Deflationary trends created by idling home sales?‏

Brokers may have been right all along in suggesting the government has simply been too aggressive in its efforts to slow down the real estate market, with growing speculation among economists that the BoC will soon have to fight deflationary trends, in part fueled by idling home sales.

“The inflation right now is very low and it will stay very low in the coming months,” Benoit Duricher, senior economist for Desjardins Group said to the Canadian Press. “So the Bank of Canada should be worried about that.”

That concern was front and centre for industry players expected to parse every word of Wednesday’s BoC rate update. The bank, as expected, held its Overnight rate at 1 per cen, although it lowered its forecast for inflation at the same time suggesting the economy is strengthening.

The bank anticipates that economy grew by 1.8 per cent in 2013, but will expand another 2.5 per cent this year.

That may be overly optimistic, say some analysts, given recent comments by the bank’s governor, Stephen Poloz.

“If the U.S. economy is strengthening as we believe, those will be very welcome kinds of market pressures,” Poloz said on CBC’s the Lang and O’Leary Exchange earlier this month. “But it’ll still be up to us what our monitored policy should be, independently of what’s going on in the U.S. and that will depend on where is inflation relative to where we expect it to be. Right now it’s expected to be too low for too long so that’s where we sit.”

Many pundits are pointing to the aggressive measures the federal government has taken to rein in a hot housing market as a main contributor to slower-than-expected inflationary growth, which has been held below the two per cent target for 19 consecutive months.

It remains to be seen if the central bank will lower interest rates in a bid to encourage positive inflation.