The Bank of Canada building in Ottawa, on May 23, 2017.Chris Wattie/Reuters
The Bank of Canada is expected to pause its monetary policy tightening campaign this week, weighing stubborn inflation data against growing evidence that the Canadian economy has begun to stall.
Analysts expect the central bank will keep its benchmark interest rate at 5 per cent Wednesday, after hikes in June and July.
There’s a widespread belief on Bay Street that Canadian interest rates have peaked, according to polls and swap market data, with no more hikes needed to wrestle inflation back under control. But economists don’t expect the central bank to signal a formal end to its tightening campaign this week, given the risk that inflation could push higher.
Bank of Canada Governor Tiff Macklem “will need to see more disinflationary momentum for that, and it could be some months before we’ll have enough labour market slack for the bank to be comfortable in stating that rates are high enough to do the job,” Canadian Imperial Bank of Commerce chief economist Avery Shenfeld wrote in a note to clients.
“But if they skip a hike in September, we expect that the balance of risk calculation will ultimately clarify that rates have in fact peaked for this cycle.”
The Bank of Canada first paused its tightening campaign in January, offering a brief respite to homeowners and other borrowers who had been hammered by eight consecutive rate hikes over the previous year.
This “conditional pause” did not last long. In June, Mr. Macklem and his team raised interest rates again in response to strong consumer spending and employment data, as well as an unwelcome surge in real estate prices through the spring. The central bankers hiked rates again in July and warned that inflation could take longer than previously expected to fall back to the bank’s 2-per-cent target.
Over the past month, however, key economic indicators have begun moving in the direction the bank wants to see as it attempts to slow down the economy to curb inflation.
Canada shed 6,400 jobs in July, and the unemployment rate rose to 5.5 per cent, up half a percentage point over three months. Meanwhile, sluggish retail sales data for late spring and early summer suggest Canadian shoppers are beginning to tap out.
The strongest evidence of a slowdown came Friday, with the publication of weaker-than-expected GDP data. Economic activity contracted at an annualized rate of 0.2 per cent in the second quarter, Statistics Canada said, led by a drop in new construction and a slowdown in consumer spending, alongside a hit to resource industries affected by wildfires. The Bank of Canada had been expecting 1.5-per-cent annualized growth in the quarter.
“Between the half-point rise in the unemployment rate in the past three months – a clear and present warning sign – and the big slowdown in GDP, it’s quite apparent that past rate hikes are now weighing heavily on households, and that it’s a matter of time until that translates into cooler underlying inflation trends,” Bank of Montreal chief economist Doug Porter wrote in a note to clients.
But one key metric isn’t moving in the right direction: inflation itself. Annual Consumer Price Index inflation rose to 3.3 per cent in July from 2.8 per cent in June, moving back out of the central bank’s 1-per-cent to 3-per-cent target band. Some measures of core inflation, which filter out volatile price movements, ticked lower. But most of these measures continue to run in the 3.5-per-cent to 4-per-cent range.
Inflation is a long way down from the 8.1 per cent reached in June, 2022. But much of this disinflation has come from favourable year-over-year oil-price comparisons that are no longer weighing on the CPI. Mr. Macklem warned in July that inflation could get stuck around 3 per cent if the central bank is not careful.
Interest-rate hikes work with a considerable lag, and the Bank of Canada sets monetary policy based on where it thinks inflation is heading, not where it is today. That means central bankers need to balance the risk of doing too little to control runaway prices against the risk of doing too much and causing a painful recession.
This calculus is particularly tough at the moment, given that rate hikes don’t appear to be as potent as in the past. That has left central bankers wondering if they need to raise rates more or simply give hikes more time to work their way through the economy.
One thing seems certain: Interest-rate cuts aren’t on the near horizon, even with signs that the economy may be entering a mild recession, which is often defined as two quarters of negative growth.
“The Bank of Canada has one mandate – and that’s to maintain inflation at their target rate,” Nathan Janzen, Royal Bank of Canada’s assistant chief economist, said in an interview.
“So we think that they’ll be more cautious about pulling back on the monetary policy brakes or pulling back on interest-rate hikes than they might have been in the normal economic cycle. And they won’t rush to cut rates when they see the economy starting to soften.”
Wednesday’s rate announcement will be a one-page affair, with no accompanying economic forecast. Mr. Macklem will deliver a speech the following day in Calgary, his first public comments since the July rate announcement.
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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