Bank of Canada Governor Tiff Macklem at a news conference after announcing an interest rate decision in Ottawa on April 12.BLAIR GABLE/Reuters
The Bank of Canada is widely expected to hold the line on interest rates this week after inflation fell unexpectedly in September while economic growth continues to flounder.
Until a week ago, the jury was out on whether Governor Tiff Macklem and his team would increase borrowing costs again on Oct. 25. Inflation had been ticking higher over the summer, and Canada’s top central bankers were sending hawkish signals that more tightening might be needed to get rising prices under control.
A string of data releases published last week appear to have settled the case in favour of keeping the policy rate at five per cent on Wednesday, according to analysts and bond traders.
Soft retail-sales data from August showed that Canadians are feeling the pinch of higher interest rates and cutting back on spending. Meanwhile, the central bank’s quarterly business survey found that companies are gloomy about future sales, and plan to curb hiring and investment. These are positives from the Bank of Canada’s perspective, as it tries to slow the economy to reduce upward pressure on prices.
Most importantly, the inflation rate fell to 3.8 per cent in September from four per cent in August, Statistics Canada said last week. That’s still nearly twice the central bank’s two-per-cent Consumer Price Index inflation target. But it came in below Bay Street forecasts and marked a reversal after two months of accelerating price growth.
“Inflation has surprised on the upside relative to the central bank’s last forecasts in July. But most of that was driven by rising energy inflation more recently as global oil prices edged higher,” Royal Bank of Canada economists Nathan Janzen and Claire Fan wrote in a note to clients.
“The latest CPI data for September also looked decidedly better, with slower growth in the BoC’s preferred ‘core’ measures breaking a string of upside surprises.”
Interest-rate swaps, which capture market expectations about monetary policy, are pricing in a roughly 15-per-cent chance that the Bank of Canada raises interest rates this week, according to Refinitiv data. That’s down from around 40 per cent before the CPI report. Of 32 economists polled by Reuters, 29 expect the central bank to stand pat this week.
A sharp rise in global bond yields in recent months has already pushed up borrowing costs for households, businesses and governments.
Mr. Macklem told reporters two weeks ago that higher bond yields don’t necessarily preclude further rate hikes by the Bank of Canada. But other central bankers, including top officials at the U.S. Federal Reserve, have argued in recent weeks that higher long-term rates may be a proxy for more central bank moves.
“Make no mistake, the recent rise in bond yields is indeed a substitute for a rate hike,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients. “So while data on businesses and households has been mixed, there’s little question that financial conditions have tightened enough to offset any unanticipated strength in the economy.”
The Bank of Canada has raised interest rates 10 times since March, 2022, in the most aggressive campaign of monetary-policy tightening in decades. After two rate hikes over the summer, it held its policy rate steady in September but left the door open to additional rate hikes if inflation remains high and the economy doesn’t slow as much as expected.
Economists have been surprised by how resilient the Canadian economy has been to the interest-rate shocks over the past year and a half. However, the evidence is increasingly clear that higher borrowing and debt-service costs are taking a toll.
Gross domestic product contracted slightly in the second quarter and appears to have flatlined through the summer. The housing market has entered another slump, and the unemployment rate has moved up since the spring – albeit from a low starting point – while job vacancies have fallen.
“In contrast to the clouds of uncertainty hanging over the inflation outlook, we see considerably less ambiguity around the near-term path for GDP growth,” a group of Toronto-Dominion Bank rate strategists, led by Robert Both and Andrew Kelvin, wrote in a note to clients.
“The growth outlook has weakened substantially since the [central] bank published its July Monetary Policy Report, and while our base case remains a soft(ish) landing, there is very little to cushion against further growth shocks,” they said.
The Bank of Canada will publish a new economic forecast alongside its rate decision on Wednesday. Mr. Macklem said two weeks ago that the bank was “not going to be forecasting a serious recession.”
The bank’s most recent forecast from July shows economic growth stalling through the remainder of 2023 and the first half of next year. It projects inflation won’t return to two per cent until the middle of 2025.
While the economy appears to be shifting into a lower gear, analysts expect Mr. Macklem to maintain a hawkish tone on Wednesday, keeping the possibility of further rate hikes on the table. That’s because several key indicators the central bank is watching to determine future inflation aren’t co-operating.
Average hourly wages are growing at around five per cent annually, a pace that Mr. Macklem says is “not consistent” with price stability. Meanwhile, Canadian businesses continue to increase prices more frequently and by larger amounts than is normal. And both consumers and companies expect inflation will remain well above the bank’s two-per-cent target for some time – a belief that can feed into inflation itself.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
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