Bank of Canada Decision on Inflation Target Bodes Well for Canada’s Housing Sector

Interest rates are arguably one of the most important predictors of the direction of the housing market. Together, the two share an inverse relationship: when rates go up, housing activity almost always goes down. That is why the Bank of Canada’s (BoC) recent decision to leave unchanged the way that they target interest rates is an important one, and one that appears supportive of the real estate market as well.

Canada’s central bank, and by extension its banking system as a whole, is well-regarded globally. Monetary policy remains an important tool for national policy makers intent on providing citizens with financial stability. Financial stability is essential for a healthy housing market.

Since 1991, the BoC has used a so-called ‘inflation target’ to help guide them in their decisions on where to set interest rates. Their target band is for the Canadian inflation rate (the annual change in the Consumer Price Index (CPI), the basket of goods and services consumed by the ‘typical’ household) to be between 1 and 3 per cent. If inflation nears the low-end of this band, there is an argument for rates to be cut to stimulate growth. If inflation reaches the upper-end of the band, then monetary policy needs to be tightened and rates are raised.

Last week the BoC reiterated their commitment to keeping the inflation target band between 1 and 3 per cent.  There was some speculation that they might raise the target, or change it in some way, but they refrained from doing so, perhaps because policy is indeed working at the moment. The Canadian inflation rate as of September was 1.3 per cent, prompting speculation that an interest rate cut might occur this month. Although the BoC declined to cut the prime rate for now, they have suggested that they are watching the economy very closely and will add more stimulus if necessary.

What the BoC has changed, however, are the other measures of inflation that they watch as a way to understand the economy. Up until now the central bank has had one measure of ‘core’ inflation, the CPI which removed the eight most volatile price measures, as well as the effect of indirect taxes. That will be replaced by three new ways to look at inflation, which will hopefully give them a more nuanced look at the way that the economy is changing.

Although in recent years Canada has gotten dragged into recessions caused by events outside of our borders, the BoC’s yardstick has worked relatively well otherwise and our central bank has done what is generally judged to be a good job on policy. Certainly the real estate sector has benefitted from what have mostly been appropriate decisions on where interest rates should be. That the BoC is continuing with a policy that works well, and is also adding to ways that it measures inflation in Canada, can be seen to be a good thing, and one that bodes well for the housing sector in Canada.

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