MNI: Tracking CPI-Ex Mortgage Interest Would Aid BOC- CD Howe
MNI (OTTAWA) - Tracking inflation excluding mortgage interest costs would improve the Bank of Canada's performance through potential economic turning points, according to an upcoming report from the C.D. Howe Institute obtained by MNI Monday.
Headline consumer prices and the Bank's current core measures include mortgage costs that tend to lag swings in overall price trends, according to the paper by former central bank adviser Steve Ambler and the Toronto-based think tank's monetary policy director Jeremy Kronick.
That's especially true after big changes in the policy interest rate, suggesting other inflation measures could have encouraged officials to stay on hold for too long after such monetary cycles, they wrote. (See: MNI: Bank Of Canada Is Lagging On Rate Cuts- CD Howe)
“Measuring inflation after stripping out mortgage interest costs can be a tool to help anticipate the future evolution of inflation in specific circumstances -- in particular during and after major monetary policy tightening and easing cycles,” Ambler and Kronick wrote. The paper was reviewed by former BOC Deputy Governors Pierre Duguay and David Longworth.
PERHAPS LATE GETTING GOING
Enough Canadians hold five-year fixed-rate mortgages that interest costs can for example stay elevated well after a BOC tightening campaign slows down other prices according to the report. While the Bank cut interest rates from 5% in June to 3% in January, mortgage interest inflation was 10% that month, adding 0.5pp to headline inflation. (See: MNI: Trudeau Privy Advisers Studied Sticky CPI, Higher Rates)
Excluding mortgage interest, inflation was at or below the Bank's 2% target every month except one since the start of last year, "suggesting that the easing cycle was perhaps late to get going and behind where it needs to be today," Ambler and Kronick wrote.
Governor Tiff Macklem said in a Feb. 21 speech that a mandate review due next year will look at adopting broader inflation measures. Officials have also backed away from using one of the three core measures it created a few years ago, and recently suggested another one is an imperfect trend measure. Macklem also suggested persistently high shelter prices may distort core inflation measures.