Canadian consumers caught a bit of a break this Christmas after the Bank of Canada — as expected — held the line on interest rates ahead of the busy holiday shopping season.The central bank announced on Wednesday that it had elected to keep its key ‘overnight’ rate at 5% while”continuing its policy of quantitative tightening”, which is code for saying it isn’t prepared to tap the brakes just yet in order to keep inflation at its 2% target.“Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year,” it said in a statement.But it came with a pretty big caveat: “(The) Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed.” Specifially, the bank wants to see further and sustained easing in core inflation, inflation expectations, wage growth, and corporate pricing behaviour. The bank said it further “remains resolute in its commitment to restoring price stability for Canadians.”It was the final rate announcement of the year. The next announcement is expected on Jan. 24, 2024..The bank has introduced 10 rate increases between March last year and this July, spiking that policy rate by 475 basis points to a 22-year high after Canada’s annual inflation rate hit its highest level in 39 years in June 2022.Despite lower overall inflation numbers — the headline rate dipped to 3.1% in October due to lower gasoline prices — the bank said shelter price inflation has picked up, along with higher mortgage interest costs. Wage growth is still rising by about 4%-5%, it added..In its report, the bank noted that what happens in the global economy will also affect Canadians at home. In the US, growth has been stronger than expected led by robust consumer spending, but is likely to weaken in the months ahead as their own rate increases work their way through the American economy. That will in turn impact Canada’s, given that more than 80% if its trade is with the US.Which is to suggest that rate hikes have likely peaked; the big question is when Canada’s bank will start easing rates to avert a full-blown recession and get the economy moving again. Most think that won’t happen until later next year.A recession is defined as two consecutive quarters of negative growth. The economy shrank about 1.1% in the third quarter, which could continue into Q4 if consumers spend less this holiday season as multiple surveys suggest they will.On the bright side, that will give policy makers the impetus to start easing.According to RBC Economics, rates will start to come down to 4.5% in the third quarter of next year and fall to about 4% by the end of 2024..“Our own forecast is that the BoC will remain on hold until the second half of next year before cutting the overnight rate,” wrote RBC economist Claire Fan. “Risks are that the move comes earlier if the economic slowdown were to become faster and/or steeper than expected.”
Canadian consumers caught a bit of a break this Christmas after the Bank of Canada — as expected — held the line on interest rates ahead of the busy holiday shopping season.The central bank announced on Wednesday that it had elected to keep its key ‘overnight’ rate at 5% while”continuing its policy of quantitative tightening”, which is code for saying it isn’t prepared to tap the brakes just yet in order to keep inflation at its 2% target.“Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year,” it said in a statement.But it came with a pretty big caveat: “(The) Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed.” Specifially, the bank wants to see further and sustained easing in core inflation, inflation expectations, wage growth, and corporate pricing behaviour. The bank said it further “remains resolute in its commitment to restoring price stability for Canadians.”It was the final rate announcement of the year. The next announcement is expected on Jan. 24, 2024..The bank has introduced 10 rate increases between March last year and this July, spiking that policy rate by 475 basis points to a 22-year high after Canada’s annual inflation rate hit its highest level in 39 years in June 2022.Despite lower overall inflation numbers — the headline rate dipped to 3.1% in October due to lower gasoline prices — the bank said shelter price inflation has picked up, along with higher mortgage interest costs. Wage growth is still rising by about 4%-5%, it added..In its report, the bank noted that what happens in the global economy will also affect Canadians at home. In the US, growth has been stronger than expected led by robust consumer spending, but is likely to weaken in the months ahead as their own rate increases work their way through the American economy. That will in turn impact Canada’s, given that more than 80% if its trade is with the US.Which is to suggest that rate hikes have likely peaked; the big question is when Canada’s bank will start easing rates to avert a full-blown recession and get the economy moving again. Most think that won’t happen until later next year.A recession is defined as two consecutive quarters of negative growth. The economy shrank about 1.1% in the third quarter, which could continue into Q4 if consumers spend less this holiday season as multiple surveys suggest they will.On the bright side, that will give policy makers the impetus to start easing.According to RBC Economics, rates will start to come down to 4.5% in the third quarter of next year and fall to about 4% by the end of 2024..“Our own forecast is that the BoC will remain on hold until the second half of next year before cutting the overnight rate,” wrote RBC economist Claire Fan. “Risks are that the move comes earlier if the economic slowdown were to become faster and/or steeper than expected.”
