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Financial security Governance Monetary policy

Is Canadian housing price inflation an intended policy outcome?

Bank_of_Canada

During the press conference following the Bank of Canada (BoC) July 2014 Monetary Policy Report, bank governor Stephen Poloz was asked whether the Bank was making up excuses – likely in response to his “serial disappointment” remark – to avoid raising its target rate. A lower rate benefits the federal government in a number of ways, primarily by lowering its debt servicing and public spending costs. However, the dangers of an extended period of low interest rates include excessive household debt accumulation, particularly mortgage debt.

But what if the BoC views excessive housing price inflation as a key economic driver – and that view is affecting its policy rate decision?

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Financial security Housing Monetary policy

Canada’s housing price stats likely contributed to inflating bubble

Chart 1 Statistics Canada,Bank of Canada and Teranet-National Bank housing price indices
Chart 1 Statistics Canada , Bank of Canada and Teranet-National Bank housing price indexes

At the July 2014 Monetary Policy Report (MPR) press conference, Bank of Canada Governor Stephen Poloz announced the Bank would be keeping its policy rate in “neutral” for the foreseeable future. While introducing a new catchphrase – “serial disappointment” – the MPR report and the Bank governor’s comments gave short shrift to the over-heated Canadian housing market, which continues to be fuelled by historically low interest rates. Despite conceding “particularly strong” price growth over the past year and “near record-high house prices and debt levels,” the Bank insists housing is in for a “soft landing”.

While the lack of housing market information has been a popular topic of late, a closer look at the little available info on housing prices may shed some light on why the Bank has downplayed rising home prices, and why if or when the housing bust happens the Bank will say it didn’t see it coming.

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Monetary policy

Exclusion of wealthy households from CPI among issues likely confounding Bank of Canada

Bank_of_Canada

A few months ago, Bank of Canada Governor Stephen Poloz announced he was giving up on economic models as the Consumer Price Index (CPI) stubbornly remained at or below the Bank’s target minimum rate. Then suddenly the CPI rose and remained at or above the Bank’s target midpoint as other economic indicators continued to show slack. Last week Mr. Poloz attributed the recent price surge to “temporary effects” while announcing the Bank was exploring a ‘neutral interest rate’ policy, effectively abandoning inflation targeting.

A closer look at how the CPI is produced may shed some light on why the measure has confounded the Bank of late.