The Bank of Canada's focus remains on taming inflation, and the new year brings some positive developments. In January, year-over-year inflation saw a decline to 2.9%, a welcome shift from December's 3.4%. Factors like falling energy prices and a slowdown in certain sectors contributed to this easing.

Shelter costs, a significant portion of the Consumer Price Index, continue to exert upward pressure on inflation. Despite a robust housing market, housing starts struggle to meet the demands of a rapidly growing population. Rental costs surged by almost 8% y/y in January, underscoring the challenges in the housing sector.

Zoning restrictions, rising construction costs, and labor shortages present hurdles to housing starts. While government initiatives aim to address these challenges, sustaining the current level of starts remains a complex task, especially given the pace of immigration.

The Bank of Canada acknowledges these dynamics, and while inflation has hit the 2% target excluding shelter costs, the impact of housing costs on inflation expectations and wage demands is a concern. The central bank is expected to initiate interest rate cuts by mid-year, anticipating a series of cuts over the next two years.

Despite population growth aiding in avoiding a recession, the labour market is showing signs of slowing, with job vacancies dropping sharply. Homeowners may face increased mortgage payments during renewals. As housing activity likely hits a bottom, price pressures are expected to mount, especially in areas like GTA and GVA.

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