Bank of Canada's Tiff Macklem spells out limits of monetary policy, says interest rates won't solve housing affordability - The Globe and Mail

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Bank of Canada Governor Tiff Macklem delivers a speech in Montreal on February 6, 2024.Christinne Muschi/The Canadian Press

Monetary policy cannot solve Canada’s housing affordability problem or boost the country’s longer-term economic growth prospects, Bank of Canada Governor Tiff Macklem said Tuesday in a speech aimed at defining the limits of what central bankers can achieve by setting interest rates.

He argued that monetary policy has a good track record of controlling inflation, even if there are times, as in the past few years, when the bank has incorrectly calibrated its response to rising prices. But central bankers don’t have control over other key economic variables, he told the Montreal Council on Foreign Relations.

“Housing affordability is a significant problem in Canada – but not one that can be fixed by raising or lowering interest rates,” Mr. Macklem said, according to the English text of his speech, echoing comments he made to the House of Commons finance committee last week.

“Housing supply has fallen short of housing demand for many years. There are many reasons why – zoning restrictions, delays and uncertainties in the approval processes, and shortages of skilled workers. None of these are things monetary policy can address.”

Shelter inflation has become a major issue for the central bank in recent months. While overall consumer price index inflation has fallen markedly over the past year-and-a-half, housing inflation – a combination of rents, mortgage interest costs and home prices – remains high.

This is partly the result of the bank’s past interest rate hikes, which have pushed up monthly payments for many homeowners whose mortgages are resetting at much higher interest rates. But rents are also rising rapidly and home prices have not declined as much as the bank had expected, given the 10 interest rate hikes since March 2022.

“Yes, monetary policy has a big effect on housing because real estate is an interest-sensitive sector. Monetary policy can particularly affect demand in the short run. But it can’t address long-running structural problems on the supply side, which are fundamental to affordability,” Mr. Macklem said.

He also said that the central bank can’t do much to boost Canada’s economic growth over the long run. Monetary policy has a big impact on the economy in the near-term, as higher interest rates dampen consumer spending and business investment. That’s apparent right now, as economic growth in Canada has effectively stalled since the middle of last year under the weight of restrictive borrowing costs.

But longer-term economic growth is determined by population growth and improving productivity, neither of which is in the hands of the central bank, Mr. Macklem said.

He said that Canada has been good at growing its economy by adding workers, through immigration and by bringing women into the labour force. But it has been a perennial laggard when it comes to productivity.

“Canada’s productivity performance is a big topic – for another speech. Canada has many advantages. A well-educated labour force, abundant natural resources, and strong university-led research in new technologies. But how this translates into productivity growth will depend on the policy choices of elected governments and the investment decisions of businesses,” he said.

The speech did not move the dial on monetary policy itself. The Bank of Canada has held its benchmark interest rate at 5 per cent for the past four rate decisions, and bank officials have said that more rate hikes are unlikely. But Mr. Macklem maintained that it was still too early to start cutting interest rates.

“We can see monetary policy is working to bring down inflation in durable and non-durable goods prices, and in inflation in services excluding shelter. And we need to give monetary policy more time to ease the remaining price pressures in these goods and services,” he said.

The central bank’s next interest rate decision is on March 6.

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2024-02-06 19:08:52Z
CBMieGh0dHBzOi8vd3d3LnRoZWdsb2JlYW5kbWFpbC5jb20vYnVzaW5lc3MvYXJ0aWNsZS1iYW5rLW9mLWNhbmFkYXMtdGlmZi1tYWNrbGVtLXNwZWxscy1vdXQtbGltaXRzLW9mLW1vbmV0YXJ5LXBvbGljeS1zYXlzL9IBAA