Bank of Canada may be cornered by the housing sector issue

According to a National Bank Economist Warren Lovely, the central bank is cornered right now a day before its monetary policy decision on Wednesday, as the real estate markets across the country are facing the affordability issue.

“Canada’s economic model relies on the housing sector too much”, – he says. “Meanwhile, the affordability is eroding for many Canadians and this problem may need an interference not only from politicians competing before the election, but from our monetary policy makers as well.”

In Lovely’s opinion, the main issue for the Bank of Canada is that it’s no longer limited to Toronto and Vancouver. Home prices are skyrocketing all over the country.

“We’re seeing a national erosion in affordability,” – noted Lovely. “If you’re a central banker, you’re in a tough spot”.

On Wednesday, the BoC will provide its new economic outlook. Lovely expects Governor Tiff Macklem to keep borrowing costs unchanged, given the latest economic slowdowns, including a weaker than expected GDP growth, and in case of the U.S., a decline for the jobs market and supply chain disruptions in the auto industry.

“It will be a difficult decision,” – said Lovely. “With all the risks and uncertainties, a stand pat strategy could be quite reasonable”.

“Needless to mention certain doubts in the ability of the labour market to keep creating good jobs.”

Last week, Statistics Canada’s report pointed to an economic contraction of 1.1% in the second quarter, while economists had predicted an annual increase by 2.5%.

Lovely believes we are in distorted conditions right now, and the recovery numbers will keep jumping during the tough periods.

“We won’t know for sure where Canada’s long-term trajectory is leading us until probably 2023”, – he added.

Although the economic growth is slowing down, the inflation keeps rising, and unlike Macklem and Federal Reserve Chairman Jerome Powell, Lovely isn’t sure it’s a temporary tendency.

“There are many reasons proving it’s not temporary”, – he said. “The inflation may remain in an uncomfortable zone for central bankers not just for one or several months, but for a longer period of time”.