Ahead of the Bank of Canada’s interest rate announcement next Wednesday, an economist at one of the country’s big six banks is urging the central bank to stop raising rates, calling recent hikes “unnecessary” and arguing that consumer spending remains lower than it was just before the pandemic hit.“History could show that the recent Bank of Canada rate hike (and any subsequent moves) was at best unnecessary, and at worst a mistake,” said CIBC senior economist Andrew Grantham in a report.Last March, the Bank of Canada began an aggressive rate-hike campaign in a bid to drive down inflation, which soared as high as 8.1 per cent. In several steps, the Bank pushed its key overnight rate to 4.75 per cent from 0.25 per cent. The central bank’s last hike in June brought the overnight rate to the highest level since May 2001. The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving prices down and slowing the economy.While inflation saw a precipitous drop to 3.4 per cent in May from 4.4 per cent the previous month, inflation remains higher than the Bank’s target of two per cent. And inflation in some sectors — including travel — is still persistently high.That means the Bank will be tempted to raise rates at its meeting Wednesday, according to economists, and markets forecast more than a 60 per cent chance of another rate hike.In the central bank’s summary of deliberations — or minutes — of the policy meetings that preceded the latest rate hike, the Bank said interest rates must not yet be restrictive enough to sufficiently curb demand, as growth and inflation had both been stronger than expected. This effectively led to the rate hike of 25 basis points delivered last month.But Grantham told the Star there “needs to be more patience” from the central bank, as it is possible that previous rate hikes are already slowing consumer spending more than the Bank perceives. “But we are focusing too much on growth rates rather than the level of consumer spending.”In his report, Grantham looked at inflation-adjusted spending on items and sectors that are most sensitive to interest rates — including household appliances, cars, travel services and restaurants — and found spending in such areas has “risen by almost 15 per cent since the first hike was delivered last year.”However, Grantham said that current consumer spending is still lower than pre-pandemic levels, suggesting that “a lot of the growth in consumer spending we’ve seen recently has been a normalization of spending activity and people being able to go to restaurants again, to take vacations again,” rather than “excess demand.”According to the report, “the level relative to 2019 tells a very different story, with the volume of spending in these interest-rate sensitive areas still one per cent below Q4 2019 levels.”That would be “even worse in per-capita terms, given the strong population growth seen recently, and represents a roughly 10 to15 per cent shortfall relative to its pre-pandemic trend.”In the first three months of 2023, the country’s population grew by more than 290,000 people, or 0.7 per cent, the highest rate of growth in a first quarter since at least half a century, when comparable data was made available in 1972.“We are still a lot lower than the level of consumption we would have been on had that pre-pandemic path continued,” Grantham said. “And that suggests that even the past interest rate hikes were already having an impact.”Ghada Alsharif is a Toronto-based business reporter for the Star. Reach Ghada via email: galsharif@torstar.ca
Ahead of the Bank of Canada’s interest rate announcement next Wednesday, an economist at one of the country’s big six banks is urging the central bank to stop raising rates, calling recent hikes “unnecessary” and arguing that consumer spending remains lower than it was just before the pandemic hit.
“History could show that the recent Bank of Canada rate hike (and any subsequent moves) was at best unnecessary, and at worst a mistake,” said CIBC senior economist Andrew Grantham in a report.
Last March, the Bank of Canada began an aggressive rate-hike campaign in a bid to drive down inflation, which soared as high as 8.1 per cent. In several steps, the Bank pushed its key overnight rate to 4.75 per cent from 0.25 per cent. The central bank’s last hike in June brought the overnight rate to the highest level since May 2001.
The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving prices down and slowing the economy.
While inflation saw a precipitous drop to 3.4 per cent in May from 4.4 per cent the previous month, inflation remains higher than the Bank’s target of two per cent. And inflation in some sectors — including travel — is still persistently high.
That means the Bank will be tempted to raise rates at its meeting Wednesday, according to economists, and markets forecast more than a 60 per cent chance of another rate hike.
In the central bank’s summary of deliberations — or minutes — of the policy meetings that preceded the latest rate hike, the Bank said interest rates must not yet be restrictive enough to sufficiently curb demand, as growth and inflation had both been stronger than expected. This effectively led to the rate hike of 25 basis points delivered last month.
But Grantham told the Star there “needs to be more patience” from the central bank, as it is possible that previous rate hikes are already slowing consumer spending more than the Bank perceives. “But we are focusing too much on growth rates rather than the level of consumer spending.”
In his report, Grantham looked at inflation-adjusted spending on items and sectors that are most sensitive to interest rates — including household appliances, cars, travel services and restaurants — and found spending in such areas has “risen by almost 15 per cent since the first hike was delivered last year.”
However, Grantham said that current consumer spending is still lower than pre-pandemic levels, suggesting that “a lot of the growth in consumer spending we’ve seen recently has been a normalization of spending activity and people being able to go to restaurants again, to take vacations again,” rather than “excess demand.”
According to the report, “the level relative to 2019 tells a very different story, with the volume of spending in these interest-rate sensitive areas still one per cent below Q4 2019 levels.”
That would be “even worse in per-capita terms, given the strong population growth seen recently, and represents a roughly 10 to15 per cent shortfall relative to its pre-pandemic trend.”
In the first three months of 2023, the country’s population grew by more than 290,000 people, or 0.7 per cent, the highest rate of growth in a first quarter since at least half a century, when comparable data was made available in 1972.
“We are still a lot lower than the level of consumption we would have been on had that pre-pandemic path continued,” Grantham said. “And that suggests that even the past interest rate hikes were already having an impact.”
Ghada Alsharif is a Toronto-based business reporter for the Star. Reach Ghada via email: galsharif@torstar.ca
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