Cutting rates too soon could spur housing market ‘rebound’: Bank of Canada

Evidence is mounting that the Bank of Canada’s benchmark interest rate is high enough to bring inflation all the way back to the two-per cent target, deliberations from the central bank’s latest rate decision show.

But policymakers at the Bank of Canada also expressed fears of a resurgence in the Canadian housing market that could keep inflation elevated if the central bank moves to rate cuts too quickly.

The Bank of Canada opted to hold its policy rate steady at 5.0 per cent for the third consecutive decision on Dec. 6, while maintaining warnings that another hike is in the cards if progress in taming inflation stalls.

Details released Wednesday of the governing council’s decision-making progress for that date show a growing acceptance that interest rate increases over the past two years have been successful at reining in consumption and relieving price pressures.

“Members agreed that the likelihood that monetary policy was sufficiently restrictive to achieve the inflation target had increased,” the deliberations read.

That differs from language in the deliberations released in the wake of the Oct. 25 rate hold, when the Bank of Canada noted that “some members felt that it was more likely than not that the policy rate would need to increase further to return inflation to target.”

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Monetary policymakers said they were particularly encouraged by progress in the central bank’s preferred core inflation metrics since its last decision in October. They added, however, that one month of easing was not a trend.

Despite the growing confidence, the governing council continued to acknowledge risks remain in the inflation outlook and that further hikes may ultimately be necessary.

The deliberations highlighted ongoing pressure in shelter price inflation that “could make it more difficult” to hit the two-per cent inflation goal.

While some members of council said that costs related to housing prices would continue to ease under the weight of higher interest rates, others were concerned that shelter price inflation “could persist or even accelerate” amid a lack of supply and growing demand in the Canadian housing market.

Cutting interest rates too early — lowering the cost of borrowing for existing homeowners and prospective buyers — could reignite inflationary pressures, the council said.

“Members noted that if financial conditions eased prematurely, the housing market could rebound, further fuelling shelter price pressures,” the deliberations read.

More to come…

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