In a decision that surprised nobody, the Bank of Canada kept the interest rates steady at 5% and gave the usual cautionary language that they’re watching the situation carefully.
However, my post is about the press conference the Bank of Canada held a day later, titled “What population growth means for the economy and inflation“.
In the Bank of Canada’s page describing this December 7 press conference, they highlighted the following quote (bold emphasis my own):
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“Strong immigration since the start of 2022 has helped increase Canada’s workforce…. And the larger workforce has boosted the level of our potential output by 2% to 3% without adding to inflation. This is a significant improvement, especially considering Canada’s otherwise rapidly aging population.”
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Then just a little bit lower down, we have the following (again, bold emphasis my own):
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The impact on inflation
When newcomers move to Canada, they need to buy many necessities to help them get settled. This increases demand for goods and services, which can have an impact on inflation.
Not all newcomers affect the economy in the same way. For instance, because of their high tuition fees, international students typically add to consumption more than many other newcomers. Overall, though, the initial boost to spending from the recent rise in newcomers has had very little impact on inflation.
But newcomers also need housing, and that’s a different story. Canada has long had housing supply challenges for many reasons, including:
* zoning restrictions
* lengthy permitting processes
* a shortage of construction workers
The result is that new housing construction has not kept up with population growth for many years.
With these housing supply challenges, the recent increase in newcomers has added to the pressure on rent and housing prices. And this has affected inflation.
Ultimately, Canada needs more housing, and the recent focus by all levels of government to increase construction is a welcome development.
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I take amusement in the phrases “without adding to inflation”, “which can have an impact on inflation”, “has had very little impact on inflation”, “this has affected inflation” all bundled together – talk about covering your bases!
The Bank of Canada is just as much a political beast as our members of parliament are in Ottawa, but the way they express it is different in flavour. They are trying to telegraph something fairly obvious, in that the component of CPI that is contributing the most to inflation is related to real estate:
It does not take a Ph.D. in economics to determine that if you admit a million people into the country a year, and the increase in housing stock is well less than a million homes, that prices are going to rise.
That said, the year-over-year comps for mortgage rates (looking at 5-year and variable) is about to level off in 2024 and this component of CPI will abate. The Bank of Canada raised to 4.5% on January 25, 2023 before taking a pause and then raised to 4.75% on June 7, 2023 and 5.00% on July 12, 2023. Energy prices have dropped considerably year-to-year and this will also provide a tailwind to the economy.
It reminds me of a fictional economic scenario where a loaf of bread costs $1.00 and next year it goes to $2.00. Inflation is 100%, people panic, and then some action is taken. Next year, the load of bread costs $2.04 and then everybody cries victory that they have conquered inflation. This will likely be the result of some disastrous economic decisions made during the Covid crisis.
“The Bank of Canada is just as much a political beast as our members of parliament are in Ottawa”
This is not a fair or true statement and it serves to undermine confidence in our world-class CB.
It is true that the BOC must be extremely careful with their communications, since the market looks for nuances to provide clues as to future courses of action. It is also true that the BOC must lean against fiscal strategies on the political side that do not serve Canadians well. It is not true that the BOC is staffed by buffoons hell-bent on scoring points against one another which is take-away easily assumed by the statement above.
The BOC is run by highly skilled technocrats and populated by some of the best economist in Canada (and has been for decades). It has performed extremely well (relative to other countries) for a long time and has a lot to do with the level of economic security enjoyed by Canadians.
I am a big fan of Divestor but casual statements like the one above only serve to degrade faith in the Canadian institutions that still run effectively.
You forgot the fragment of my claim after your initial quotation: “… but the way they express it is different in flavour.”
The BoC has a public-facing side and because they know people react on their words and guidance, they have to play the political dance. Just in a different flavour.
Remember these lines?
“If you’ve got a mortgage of if you’re considering making a major purchase, or you’re a business and you’re considering making an investment, you can be confident rates will be low for a long time” (July 15, 2020 presser)
(political message: please borrow and spend and save our economy!)
… don’t get me started on ‘transitory’ inflation either, anybody with a few functioning brain cells knew that it was going up like a SpaceX rocket. Even Macklem in the middle of 2021 was obviously not believing what he said but was forced to toe this line.
This conclusion I am sure you will disagree with, but the December 7th presser I linked above in the comments is essentially the BoC trying to cover their rear ends with regards to what the government is doing. Why that specific topic at that moment?
This is politics, but different in flavour.
Haha, you’re right. I disagree.
In 2020, it did look to many reasonable people (in most developed countries) that rates would be stuck very low for very long. It was not clear at all that inflation would run away and would need the kind of intervention we have experienced. We had a severe demand problem that did need spending by people, governments and corporations to keep the economy from imploding. The COVID shutdowns was the real culprit with runaway inflation (generous fiscal stimulus, supply chain decimation, stay-at-home demand surges, etc.)
One of the key tools of CBs is “forward guidance”. I think this is what you are calling politics. I don’t. Forward guidance means messaging what they want to happen so that they can minimize actual intervention. The 2020 guidance to borrow (please borrow) was obviously harmful to those who shouldn’t have but probably the best advice at the time. Its not possible for the BOC to be 100% right.
Today, the BOC is guiding that they will not stop raising rates until inflation hits the 2-3% range. Everyone knows they are done. They do too. They keep saying it because they have to. This is not politics. It is being clear. Damn clear.
My main point is the BOC deserves respect. It is a competent institution that has served Canadians well. Equating what they do to what happens in “politics” is not fair or reasonable.