There's an old saying: Stop digging when you're in a hole. The Bank of Canada just proposed something different: stop measuring how deep the hole is.
Deputy Governor Rhys Mendes dropped a bombshell this week in a speech at Western University, the kind of wonky policy trial balloon that sounds boring until you realize it could reshape your clients' mortgage costs for years to come. The BoC is seriously considering removing mortgage interest costs from core inflation calculations. Yes, you read that right. The thing they directly control (interest rates) creates what they're trying to suppress (inflation), and now they want to stop counting it.
The Problem: A Self-Inflicted Measurement Wound
Here's the absurd loop we're stuck in. The Bank of Canada raises rates to cool inflation. Higher rates make mortgages more expensive. Those higher mortgage costs show up as...wait for it...inflation. Specifically, shelter inflation, which is the single biggest weight in the CPI basket.
So the Bank looks at its inflation dashboard, sees shelter costs screaming upward, and thinks "we need to keep rates high to fight this." Except they're fighting a fire they started. It's monetary policy eating its own tail.
Mendes called this "noise" that obscures whether their policies are actually working. That's central banker speak for "we can't tell if we're winning because we keep punching ourselves in the face."
The numbers back this up. Currently, the BoC's preferred core measures (trim and median) show inflation at 3%, stubbornly above their 2% target. But Mendes says underlying inflation is really around 2.5%. That 50-basis-point gap? A big chunk is mortgage interest distortion. And that gap matters, because it influenced September's rate cut debate. Some officials wanted to hold steady at 2.75%. Others argued the economy needed relief. The rate came down to 2.5%, but it was a close call.
Why This Actually Makes Sense
Before you dismiss this as bureaucratic nonsense, consider what the Bank is really saying: its current tools are designed for an economy that no longer exists.
Core inflation measures were built to strip out "volatile" items like food and energy, which bounce around due to external shocks. The idea is to see the underlying price trend without short-term noise. But mortgage costs aren't volatile noise. They're a direct, predictable response to the Bank's rate policy. Including them in the measurement is like a doctor checking your blood pressure while squeezing your arm.
Other central banks have already figured this out. The Fed doesn't include mortgage interest costs in its preferred inflation measures (PCE). The European Central Bank uses different methodologies. Canada is actually late to this realization, probably because we've been so obsessed with using rate policy to cool our housing market that we forgot rate policy and housing inflation are mechanically linked.
The Risk: Ignoring Real Pain
Here's where it gets uncomfortable. Excluding mortgage costs from inflation might give the BoC cleaner data, but it also lets them ignore the biggest cost pressure facing Canadian households. Shelter costs (rent, mortgage interest, everything) crunch family budgets. If the Bank gets to look past that because it's "noise," they might hit their 2% target while your average client still can't afford to renew their mortgage or buy a home.
That's not a theoretical concern. The BoC has already been criticized for aggressively hiking rates, triggering a wave of mortgage payment shock for variable-rate holders and renewers. If they now get to report "mission accomplished" on inflation while ignoring the housing disaster they partly engineered, that's a credibility problem.
The Bank's counterargument would be that mortgage costs are temporary. When rates come back down, that inflation disappears. And they're right—mortgage interest inflation is mean-reverting in a way that wage growth or services inflation isn't. But telling a family facing a $800/month payment increase that it's "temporary noise" will not land well.
What's Next
The BoC's inflation-targeting mandate gets renewed next year. That's the formal agreement between the Bank and the federal government that sets the 2% target and defines how they measure success. Expect this mortgage cost debate to feature prominently in those negotiations.
Mendes also mentioned that the Bank is experimenting with AI to model core inflation and is looking at "multivariate core trend" measures. Translation: they're throwing everything at the wall to figure out what signals persistent inflation in a post-pandemic, tariff-disrupted, housing-shortage economy. The old playbook isn't working.
For mortgage brokers and real estate pros, the takeaway is simple. If the BoC moves forward with this change, core inflation numbers will likely come in lower than they do now—potentially justifying faster rate cuts. That's good news for clients on variables, renewers facing payment shock, and buyers waiting on the sidelines.
But don't mistake cleaner data for a housing market fix. The affordability crisis isn't about measurement methodology. It's about supply, demand, immigration, and decades of policy failure. The BoC can redefine inflation however they want. It won't build a single home.
The Big Question
Should the central bank exclude the costs it creates when measuring whether its policies are working? It's like asking whether you should ignore your mistakes when grading your test.
Maybe the answer is yes, if the alternative is making bad decisions based on distorted data. But it sure feels like we're optimizing for the wrong thing.
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