By Promit Mukherjee and Steve Scherer
OTTAWA (Reuters) - Bank of Canada Governor Tiff Macklem, speaking a month before the federal budget is delivered, on Wednesday warned against policies that might spur demand amid a housing crunch, saying it can only be resolved by increasing supply.
In an interview after keeping its key overnight rate on hold at 5% earlier in the day, Macklem said that borrowing costs cannot solve the country's housing problem.
"Our message really is that high rates, low rates - if we don't grow supply, we're not going to solve the housing problem," Macklem said.
"Policies that mostly add to demand are not helpful at this time. Demand is not the problem. Policies that are more skewed to increasing supply would be helpful."
Shelter costs continue to be the primary driver of inflation, which in January was 2.9%, still above the central bank's target of 2%.
His comments on housing come as Prime Minister Justin Trudeau's government puts together its next budget, which Finance Minister Chrystia Freeland said will be focused on building homes.
"Our economic plan is about building more homes, faster, making life more affordable, and creating more good jobs," Freeland said when she announced the budget would be delivered on April 16.
When asked about a Canadian Home Builders Association suggestion to allow for 30-year insured mortgages for first-time homebuyers who purchase a newly built house, Macklem said he would not comment on specific policies.
"We're not the experts in increasing supply in housing," Macklem said, adding however that with strong underlying demand, "we don't need policies that stimulate demand."
When the Bank of Canada paused its interest rate hikes last year, housing prices spiked, only to come down again when it raised them by a half-a-percentage point in the summer.
A rush back to the market when rates start to come down would mean "the scope to cut interest rates is less," Macklem said.
There have been signs of a recovery in the housing market even though rates remain at a 22-year high, including a surge in sales in the Toronto area in January.
"We really need policies that are focused more on the supply side and I will say I think governments are acutely aware of this," Macklem said.