Finance Minister Chrystia Freeland broke with tradition, praising the Bank of Canada’s decision to maintain interest rates, aiming to relieve financial pressure for Canadians. Despite this, the government is intensifying efforts to address affordability challenges.

In a recent announcement, the federal government revealed a set of measures, including a reduction in Goods and Services Tax for rental-housing construction, strengthened powers for the Competition Bureau to combat aggressive pricing and deter corporate mergers, and plans to encourage grocery chains to lower prices, threatening “tax measures” if compliance isn’t met.

In some aspects, the sudden increase in government action might seem odd. Over the past year, the yearly rate of Consumer Price Index (CPI) inflation has dropped from 8.1% last summer to 3.3% this July. At the same time, wages are increasing by about 4 to 5%. Many experts and those in the bond market believe that the Bank of Canada’s policy rate has reached its peak at 5%, the highest it’s been since 2001. However, Governor Tiff Macklem has made it clear that if inflation remains high, he’s willing to raise rates even more.

Despite this, the prices of food and rent are still going up rapidly. Many homeowners are starting to feel the pressure of higher interest rates, especially as fixed-rate mortgages need to be renewed. Housing affordability is at its worst, especially for people buying a home for the first time.

After grappling with high inflation for two years and escalating interest rates for 18 months, the government is refocusing on the cost of living. The move comes amid a decline in the Liberal Party’s popularity and increasing attacks from political adversaries. Prime Minister Justin Trudeau is also facing internal criticism for the government’s handling of affordability issues, particularly in the housing sector.

Several premiers, including those of Ontario, British Columbia, and Newfoundland and Labrador, urged the Bank of Canada not to raise interest rates. In response, some provinces have decided to reduce provincial sales taxes on rental-home construction.

While these policy measures are seen as steps in the right direction, experts believe larger interventions are needed to tackle the housing affordability crisis effectively. The Canada Mortgage and Housing Corp. estimates the country needs about 3.5 million additional housing units by 2030 to restore affordability.

However, there’s a challenge in the government’s ability to significantly impact monetary policy. Finance Minister Freeland could direct the Bank of Canada to lower interest rates by issuing a written directive. However, this has never been done and is considered a last-resort option due to its potential impact on the financial system.

Economists emphasize that a meaningful reduction in inflation necessitates substantial changes in spending or taxation policies. While government spending isn’t the main driver of current inflation, it isn’t acting as a counterweight either. To significantly affect inflation, experts suggest a 10-percentage-point change in government spending relative to the economy, a considerable task given the size of Canada’s economy.

While the government is making efforts to tackle rising costs and inflation, it faces challenges in achieving substantial impacts without more significant policy shifts. Balancing public opinion, political pressures, and economic realities remains a delicate task for the government.