Chad Moore Calgary Mortgage Broker

The Bank of Canada’s new Governor, Tiff Macklem, released a webcast June 22nd speaking to Inflation and COVID in the Canadian Economy. Here is a breakdown.

Here’s what we’ll cover in this post for you:

1. Monetary policy fundamentals.
2. Inflation fundamentals.
3. Supply and demand fundamentals.

Monetary Policy

The Bank of Canada (BoC) helps control money supply, interest rates, inflation and much more in Canada. They help with all things to do with monetary policy in Canada, that trickle into effecting and steering the Canadian economy.

Fiscal policy is set by the Federal Government. This also has a direct effect on the Canadian economy. Fiscal policy is related to taxes, infrastructure spending initiatives, and debt. All fiscal policy is Government related.

The BoC and Federal Government are technically separate entities that operate independently. However, each of their decisions do effect the overall economy and thus their outlook and policy decisions.

Inflation Fundamentals:

Inflation is the change in price of goods over time. As the money supply increases, things naturally cost more money over time.

The Bank of Canada (BoC) has a ongoing commitment/agreement with the Canadian Government to uphold the mandate of low and stable inflation. This target inflation range is between 1-3% with a more narrow focus of maintaining a 2% inflation target.

The Consumer Price Index (CPI) is the main inflation measure. CPI is essentially a measurement in price change of a basket of goods over time.

Traditional changes in monetary policy happens like this:

Economic Expansion

• Monetary and Fiscal policy change help stimulate economic growth (primarily through the expansion of debt).
• The economy expands.
• People & corporations make more money.
• The cost of goods rises above the inflation target.

Economic Restrictions:

• Monetary and or Fiscal policy become less accommodative (restrictive).
• The economy eases.
• People and corporations spend less.
• The cost of goods rises within the inflation target.

This is a traditional business cycle. The current economic environment we are in is less than traditional …

Supply & Demand: Monetary Policy In A Pandemic.

The necessary evil of the economic lockdown in Canada, and other parts of the world, reduced supply and demand of nearly everything.

Supply.

In Calgary, we saw a steep reduction of new home supply inventory due to the virus. New housing supply is slowly coming back as we have reduced total virus cases and less new infections. Overall housing supply is persistently quite high due to the carry over of home inventory pre-COVID. I’m holding my breath as new housing supply comes on the market. If it significantly outstrips demand, the fix is in for down pressure on pricing.

Re-opening of the economy is happening unevenly throughout different industries, parts of the country and globe. At the extreme end of the spectrum, some industries won’t reopen until there is a vaccine. This is disrupting supply chains in terms of prices and exports which will cause capacity issues to linger in our economy after virus containment measures are lifted.

Demand.

Consumer demand has also been stomped out …like stomping out burning embers in a grass fire.

We saw significant and acute reduced demand for new home purchases in Calgary. Sales essentially fell off a cliff, but are slowly returning.

Many people saw either their incomes significantly reduced or lost. Lower income results in less spending and thus reduced demand for consumer items (including housing). As consumer confidence resumes with incomes returning as various industries re-open, demand is increasing. I think many Canadians are increasing their savings rate, which I support. This however also dampens our economy because people are spending less!

And this is what the Bank of Canada is fearful of …

To the extent that economic supply out strips consumer demand (spending) that will result in low or negative inflation.

If, as we expect, supply is restored more quickly than demand, this could lead to a large gap between the two, putting a lot of downward pressure on inflation. Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work.

Tiff Macklem, BoC June 22, 2020.

Jobs. Jobs. Jobs.

Not only does the Bank of Canada want (need) people back working, our provincial government is hell bent on that too!! Jason Kenny announced Alberta’s recovery plan late June. This is a massive initiative to create jobs, which create a larger tax base, increasing confidence with incomes and leading people to spend.

The big question for me is how will consumer spending return? Will people be “back” full throttle? Will Canadian savings rates continue at the level they are? How much pent up consumer demand will be released? We have yet to touch on the casement of the the Mortgage deferral program and CERB. That’s looming.

Let me know if you have any questions related to the sale or purchase of your next home.

Talk soon,
Chad Moore

P.S

Do you know what a large gathering of crows is called? I heard this the other day from a friend …I could not tell if she was messing with me or not until I heard the same answer from a separate third party (I could have checked Google but where is the fun in that?)?