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The Bank of Canada is facing prolonged challenges in combating inflation due to the persistently high cost of housing, as highlighted by Toronto-Dominion Bank. According to James Orlando, a senior economist at TD, the soaring prices in the housing market are preventing inflation from reaching the central bank's target of two percent, consequently prolonging higher interest rates. With shelter inflation constituting a significant portion of the consumer price index basket at 30 percent, its substantial influence on headline inflation readings and policymakers' decisions on interest rates cannot be overlooked.

The escalation in housing costs, particularly skyrocketing rents and record-breaking increases in mortgage interest expenses, is fueling the persistence of high housing inflation. Statistics Canada reports a growth of 6.2 percent in shelter inflation in January, with rents rising by 7.8 percent and mortgage interest costs surging by 27.4 percent. Such substantial increases indicate a challenging landscape for achieving the Bank of Canada's inflation target, with TD projecting an average shelter inflation rate of six percent throughout the year.

Despite the pressure to alleviate inflationary pressures through interest rate cuts, the Bank of Canada remains cautious due to concerns that such actions could further exacerbate housing inflation. TD's analysis suggests that even if rate cuts were implemented swiftly, their impact on housing sector inflation would likely be limited. While mortgage interest costs and rents might decrease, housing prices could simultaneously rise, making it challenging to achieve a significant reduction in overall inflation without drastic measures or economic downturn.

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