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Bank of Canada Governor Tiff Macklem speaks before the Canadian Club Toronto at the Royal York Hotel in Toronto on Dec. 15.Carlos Osorio/The Globe and Mail

In its evolving battle against inflation, what the Bank of Canada is now most worried about is the part of the problem that the bank itself created.

On Wednesday, the bank released its summary of deliberations – a summation of the discussions its governing council held in the Dec. 6 decision to keep its policy rate unchanged.

The document confirmed that the council – Governor Tiff Macklem and his five deputy governors – “agreed that the likelihood that monetary policy was sufficiently restrictive to achieve the inflation target had increased.”

While that wasn’t quite news – Mr. Macklem had tipped the council’s hand on that in a news conference last week – it was still the strongest signal yet that the central bank is done with rate hikes. That’s a necessary prelude to rate cuts in the coming months, so it’s a welcome disclosure.

But what’s abundantly evident is how nervous the Bank of Canada has become about housing costs. The summary tells us that the governing council discussed the problem “at length” – the only issue that received such an emphasis in the five-page document.

The irony is hard to miss. After all, housing inflation has been primarily fuelled by rising mortgage costs – which are the direct result of the Bank of Canada’s steep interest-rate increases.

Canada’s inflation rate holds surprisingly steady on pressure from services

Charles St-Arnaud, chief economist for credit union association Alberta Central, estimated in a report this week that shelter costs were responsible for 1.7 percentage points of November’s 3.1-per-cent inflation rate – and mortgage inflation alone made up 1.13 percentage points.

In earlier stages of the bank’s rate-hiking campaign, it tended to talk about mortgage inflation as, essentially, an unfortunate side effect – a necessary evil in the application of higher rates to slow the economy and, thus, quash inflation.

But as inflation has moderated and housing costs have assumed a lion’s share of what’s left, the bank’s tune has changed. Now, the summary of deliberations indicates, that collateral damage may be the biggest obstacle in the central bank’s path back to its 2-per-cent inflation target.

The report said that members of the governing council “expressed concern that shelter price inflation could remain elevated, and that this could make it more difficult to return inflation to 2 per cent.”

The bank argued, as it has before, that high shelter costs can’t be blamed solely on interest rates – that a “structural shortage of supply” is the root of the problem. The summary noted that rents and other housing costs have soared, which is “unusual” in times when the economy is in a downturn. It concluded that high rates are slowing housing demand, as they are supposed to do, but that the supply side is the real problem.

Not to say supply isn’t the longer-term issue, but the numbers don’t lie. Most of the shelter inflation is owing to higher mortgage rates, and most of inflation is, now, owing to shelter costs.

You’d think, then, that reducing interest rates – something entirely within the central bank’s power – would tone down this one key source of overheated inflation. Yet some members of the governing council are worried that “if financial conditions eased prematurely, the housing market could rebound, further fuelling shelter price pressures,” the summary said.

Quite a conundrum, then. Cutting rates might help. Or, it might hurt. And “prematurely” might be something you’ll only know when you see it.

These are the kinds of internal worries and debates that we didn’t know a lot about prior to the introduction of the summary of deliberations at the beginning of this year.

While the document isn’t perfect, it has, increasingly, provided deeper layers of detail on the most pressing policy questions as the bank’s leadership has become more comfortable with this new instrument.

At the same time, the summary has created new communications challenges for the bank. Naturally, as the bank has told us more about the inner workings of the policy-setting process, that has opened up a whole new level of questions that the bank must deal with at its news conferences. And the leadership is having to redefine how much transparency is too much.

This was apparent in Mr. Macklem’s news conference last week. After the bank revealed in the summary for the Oct. 25 rate decision that the governing council was split on whether further rate hikes would likely be necessary, Mr. Macklem had to stickhandle around questions about divisions on the council, and whether it had become harder to agree on policy direction. (The council’s policy decisions are traditionally made by consensus.)

Mr. Macklem emphasized that the members of the council all agreed on the final decision to keep the rate on hold, even if they weren’t all on the same page on every detail of the discussion.

But his response, and the line of questioning, raised the tricky issue of how far the bank can comfortably go in disclosing internal disagreements, without compromising the view of the consensus on the big picture.

Meanwhile, with the source of internal debate now, apparently, focusing more on housing costs, it will be interesting to see how the bank handles this question as inflation continues to soften throughout the rest of the economy. Already, the inflation rate excluding shelter is 1.9 per cent; excluding mortgage interest costs, it’s 2.2 per cent.

The bank doesn’t have a lot of time before interest-rate-juiced inflation is about the only kind left.

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