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Interest rates unable to 'fine-tune' affordability: chief economist



Pedro Antunes, the chief economist at the Conference Board of Canada, has emphasized the critical role of independent monetary policy amid increasing scrutiny of the Bank of Canada's approach. In an interview with BNN Bloomberg on Tuesday, Antunes addressed the criticism directed at the central bank's high-interest rate policy from both policymakers and politicians.


Antunes underscored the importance of maintaining the independence of monetary policy, characterizing it as a "very broad tool" that, despite its efficacy, is incapable of precisely adjusting factors such as affordability or inequality. His comments align with recent statements by Bank of Canada Governor Tiff Macklem, who acknowledged the limitations of using interest rates to tackle issues like housing affordability.


Macklem, in his remarks, acknowledged that the central bank cannot fine-tune elements like affordability through its interest rate policy. He also reflected on the challenges faced during the post-pandemic recovery, stating that the central bank could have initiated the withdrawal of pandemic stimulus earlier. However, he noted that such a move might not have significantly impacted post-pandemic inflation.


The governor explained that as the economy reopened, pent-up demand outpaced supply, resulting in immediate upward pressure on prices. Macklem attributed the surge in housing prices to the central bank's decision to lower its policy rate in 2020, coupled with other factors that boosted housing demand while supply saw a comparatively modest increase. Housing prices, according to Macklem, witnessed a staggering rise of over 50 percent in just two years.


Antunes suggested that the Bank of Canada might not have fully considered the impact of these factors at the time, emphasizing that the surge in housing prices was more connected to the influx of credit and savings into a fixed housing stock, rather than the conventional dynamics of supply and demand.


Looking ahead, Antunes proposed a solution to the affordability challenge in the housing market: a focus on increasing supply. According to him, addressing the supply-demand imbalance, particularly by bolstering the housing supply, is the key to resolving affordability issues. However, he cautioned that such measures would require time to yield tangible results.


In conclusion, the debate over the effectiveness of monetary policy, particularly in addressing intricate issues like housing affordability, continues to unfold in Canada. As the chief economist at the Conference Board of Canada advocates for the autonomy of monetary policy, the challenge for the Bank of Canada lies in finding a balance between its broad policy tools and the need for more targeted solutions to address specific economic concerns.


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