Stagflation Dilemma
Happy Monday Morning!
As expected, the Bank of Canada held rates this past week. What’s perhaps more interesting, is the language they used.
“Economic weakness combined with rising inflation is a dilemma for monetary policy. Raising rates to dampen inflation could further slow the economy. Easing rates to support growth increases the risk that higher inflation becomes persistent,” Governor Tiff Macklem said in an opening statement.
“For now, holding the policy rate unchanged balances those risks.”
In other words, the economy is dealing with a bout of stagflation. Quite the dilemma indeed.
Markets are still pricing in one rate hike by the end of the year. Colour me skeptical.
Remember, Q1 GDP outright contracted, a big miss considering the BoC was forecasting 1.5% growth. Whoops.
Meanwhile, as of the time of this writing, it appears the war in Iran may have finally reached an end, for the tenth time.
“The Deal with the Islamic Republic of Iran is now complete,” US President Donald Trump said on Sunday in a social media post. “I hereby fully authorize the toll free opening of the Strait of Hormuz and, simultaneously herewith, authorize the immediate removal of the United States Naval blockade.”
Good news Tiff Macklem, the bond market, and mortgage holders alike. The Canada 5 year bond yield had already retraced 30bps over the past month, and should move further once markets are open on Monday. Let’s watch.
In other news, shelter, which is a large weight of the CPI basket continues to get crushed. Per Rentals.ca, average asking rent in Canada declined 4.7% year-over-year in May, representing the 20th consecutive month of year-over-year declines.
As of Q1 2026, the inventory of purpose-built rental units under construction reached a historic high of more than 200,000 units. Something this newsletter has been duly noting for well over a year.
Meanwhile, on a city level, rents in Vancouver have fallen on a year-over-year basis for 30 consecutive months, with the average rent now 5.6% lower than four years ago in May 2022! Rents in Toronto have fallen for 28 months, but remain 3.1% higher than four years ago.
Four of the six largest markets now have lower asking rents than three years ago in May 2023, with only Montreal and Edmonton having increased over the same time period.
As we have flagged before in our past notes, Montreal and Edmonton are not far behind. Edmonton is currently engulfed in a multiplex boom unlike nothing that’s ever been seen before, almost entirely financed via CMHC MLI rental financing. Often times, fraudulently. Although that’s a story for another time.
We continue to believe the rental market isn’t getting enough attention. Media headlines have been largely focused on pre-sale condo buyers and the mortgage renewal wall.
In other news, and perhaps on a more positive note, activity for single family detached houses in the city of Vancouver has enjoyed a noticeable uptick over the past month or so. One or two months does not make a trend, but if and when the market shifts it always happens in the single family detached market first. It starts in the city and then ripples outwards.
Vancouver house sales were up 38.5% year-over-year last month, with inventory down 10%. This is in sharp contract to the Greater Vancouver condo market which saw sales down 7%.
Single family is always the first to move. It shouldn’t be a surprise, considering we no longer build new houses. It’s a hard market to oversupply.
Move in ready houses at more attainable price points continue to sell well despite all the turmoil. Let’s see if this holds.
Thank you for your attention to this matter.
Gotta luv his humour: “Thank you for your attention to this matter.”
Bottom line...B of Canada doesn't know which way to turn and does not want to make a decision which will inevitably be the wrong one as history has shown.