Inflation Is Still Rising, Real Estate Was Unsustainable: Bank of Canada

Inflation Is Still Rising, Real Estate Was Unsustainable - Bank of Canada

Slowing inflation might be a popular take in the media, but it’s not what the central bank is seeing. The Bank of Canada (BoC) explained headline inflation fell from 8.1% to 7.6% in July, due to gasoline prices. This makes it appear that inflation is falling, but that’s not really the case.

In a statement today, they explained core inflation continued to rise from 5% to 5.5% in July. This implies inflation is still climbing, reinforcing the need for higher interest rates. 

For those unaware, core inflation is the central bank’s preferred measure of inflation. It reduces the impact of volatile components like gasoline, reducing any bias. Core inflation tends to only rise when a more general price increase is observed.

“…inflation excluding gasoline increased and data indicates a further broadening of price pressures, particularly in services,” said the BoC.

Adding, “the longer this continues, the greater the risk that elevated inflation becomes entrenched.” Entrenched inflation means there’s no rolling it back, and it can become persistent.

Canada’s Economy Is Expected To Weaken With Global Demand

The BoC warned that Canada’s economy continues to operate with excess demand. Add a tight labor market, and there’s not a lot of slack that can be picked up. Bluntly, the economy is overheated with nowhere to go, resulting in inflation.

Soaring inflation has been chipping away at economic progress across Canada. The BoC points to the 3.3% annual growth of GDP in Q2 2022, below their expectations. By using higher rates, they can slow credit driven demand. Ideally this helps reduce inflation, but in the short-term it will also reduce GDP further. 

 “The Bank continues to expect the economy to moderate in the second half of this year, as global demand weakens and tighter monetary policy here in Canada begins to bring demand more in line with supply.” 

Higher mortgage rates are cooling the housing market too. The BoC explained this was anticipated, following “unsustainable growth” during the pandemic. Financing issues are changing fast, as quantitive tightening (QT) impacts liquidity.

QT reduces credit liquidity, the opposite of the more often discussed QE. Credit growth is expected to slow in the coming months, but they have a long way to go.

Mortgage credit, for instance, continues to grow at nearly a double digit annual rate. It’s much slower than it was during the peak, but mortgage debt is close to the size of Canada’s GDP. It’s also growing over double the rate of GDP, which is unsustainable, to say the least.

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  • Great Reset 1 week ago

    Let the BoC hike the rates some more we need a Great Reset ™ in Canadian real estate. Let it fall down to affordable prices that is all we the working class ask for.

  • JCH 1 week ago

    So, as the real estate market collapses under the weight of normalizing interest rates, what does everyone think the BoC and government will do next to support house prices & stop the shocking fall?

    I’m oddly pleased that inflation is proving resilient, as that might help delay a pivot/return to ZIRP/reinflation of the housing bubble, but expect that this will prove fatally unacceptable in Canada where ‘housing always goes up’, so am curious what RE-supporting actions will be taken next…

  • Lou 1 week ago

    There are collating of two systems the old system can’t control the new one. All this is causing is more indebtment and less traction important aspect that are not discussed is the hold that AI ML has on inflation now within ecommerce. Demand is looked upon from the “interest point” that is predetermining price by hit and other factors as opposed to previously rated from sales and other sub-collab systems are at play blockchain, crypto soc. etc.

    This is a huge collapse in thinking that archeic old system structure can now effectively rein-in only within the old system way!

  • dan 1 week ago

    thats great news, cant wait to afford a house. the cdn gov should also seize foreign owned assets that are used as airbnbs or sitting vacant. the problem will correct itself just like the budget will balance itself according to Turdy. lol

  • Khurram Butt 1 week ago

    The ground reality remains that Canada continues to encourage immigration to slow down ageing, thus increasing demand pressures. If 1.5 million units are slated to be added to inventory by 2032, then someone has to buy them. And that wont happen if you keep MQR so high.
    Instead of focusing on restricting credit access to business, the BOC and its partners in govt need to focus on ADDING more players to the economy.
    Better still, let the BOC governors live on a middle class income for two months before and after every rate change they shove down our throats so they have first hand knowledge of where it bites. We’re people, not statistics.

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