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Former Bank of Canada Chief: Central bank 'intentionally' caused housing inflation, but real estate will cool - David Dodge

Kitco News

The Bank of Canada “intentionally” caused asset prices to rise in 2020 and 2021. However, recent rate hikes will have “a cooling impact” on home prices.

That’s according to David Dodge, former Bank of Canada Governor and Senior Advisor at Bennett Jones LLP. Dodge spoke with David Lin, Anchor and Producer at Kitco News.

The Bank of Canada is Canada’s central bank, equivalent to the Federal Reserve in the United States.

Dodge said that the start of the COVID-19 pandemic required governments and central banks to work together to combat a loss of production. The Bank of Canada expanded its balance sheet and lowered interest rates to do so.

“So… all [that] happened in February 2020, through until about the end of 2020, and was remarkably successful in avoiding what might have been an absolute calamity both here in Canada and around the world,” Dodge remarked. “The short story is that the Bank of Canada did exactly the right thing in the spring of 2020 in being accommodative, in order to get us through the supply shock that came with COVID.”

However, Dodge said that the Bank should have raised interest rates sooner.

“The story becomes more difficult after [2020],” he said. “We at Bennett Jones argued a year ago that indeed governments were going to have to restrict the amount of fiscal stimulus pouring into the economy, and that the Bank of Canada was going to have to end its period of excessive accommodation and begin, by the end of the year, to raise interest rates.”

He added that rates should have risen to “somewhere in the two to three percent range” in 2021.

In response to claims that loose monetary policy caused inflation, Dodge responded, “It’s quite correct… not that they did the wrong thing in 2020, but… both fiscal and monetary policy didn’t respond quickly enough in 2021, especially in the fall of 2021.”

He also said that “inflation expectations” are important in determining policy. Because such expectations are low in Canada, Dodge added that the Bank is able to rein in inflation.

“I would make one caveat to all of that,” he said. “And that is as long we are insisting on driving up natural resource prices by shutting off supply from Russia and the Ukraine and so on, as long as we’re going to do that, you can’t compensate for that by reducing aggregate demand [through interest rate hikes].”

To learn more out Dodge’s analysis of the Canadian housing market, watch the above video.

Follow David Lin on Twitter: @davidlin_TV

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