A $50 bill is pictured in Ottawa in this file photo. The Bank of Canada raised its key benchmark rate on Wednesday by a quarter percentage point to 5 per cent.Sean Kilpatrick/The Canadian Press
The Bank of Canada has increased its benchmark interest rate to 5 per cent and pushed out the timeline for getting consumer prices under control, warning that the downward momentum of inflation could stall over the next year as the economy proves surprisingly resilient to higher borrowing costs.
The quarter-point increase, which was widely expected by analysts, brings the policy rate to a level last seen in April, 2001. This will further squeeze Canadians’ finances and push up costs for mortgage holders.
In an updated forecast, the central bank said it expects the annual rate of inflation to remain around 3 per cent for the next year, declining to the bank’s 2-per-cent target by the middle of 2025.
“This is a slower return to target than was forecast in the January and April projections,” the bank said in its rate announcement. “Governing council remains concerned that progress towards the 2-per-cent target could stall, jeopardizing the return to price stability.”
The bank gave no hints about future rate decisions but left the door open to further hikes.
“We are trying to balance the risks of over- and under-tightening,” Bank of Canada governor Tiff Macklem said in a news conference after the decision. “If new information suggests we need to do more, we are prepared to increase our policy rate further. But we don’t want to do more than we have to.”
Canadian bond yields fell after the announcement, suggesting that markets were expecting a more explicit signal about further rate hikes.
Mr. Macklem and his team are grappling with the surprising strength of the Canadian economy. Many analysts expected the economy to be in a recession by now, squeezed by the most aggressive interest rate increases in a generation. However, consumer spending, job creation and the housing market have turned out to be less responsive to rate hikes than anticipated.
The bank raised its economic growth forecast for 2023 to 1.8 per cent from a previous forecast of 1.4 per cent. It expects GDP growth to slow to around 1 per cent in the second half of this year and first half of next year, but predicts the economy will avoid an outright contraction or recession.
The resilience of the economy has been good for many workers and businesses. But it’s become a headache for central bankers, who are intentionally trying to slow spending and investment to reduce upward pressure on prices and stabilize the purchasing power of the Canadian dollar.
“Today’s move can be characterized as a moderately hawkish hike, in that the BoC is certainly not closing the door on the possibility of further moves,” Bank of Montreal chief economist Doug Porter wrote in a note to clients.
“While we are not looking for further hikes this year, we are tweaking our rate call in light of the Bank’s view on growth and inflation – we now see rate cuts beginning only in the second quarter of 2024, one quarter later than our prior view,” he wrote.
The bank paused its monetary policy tightening campaign in January, betting that it had raised interest rates enough to bring inflation down over time. Interest rate increases work with a lag, and Canada’s highly indebted economy was thought to be more sensitive to rising debt-servicing costs than many other economies.
By June, this “conditional pause” seemed untenable. Consumer spending grew a massive 5.8 per cent in the first quarter and house prices began to rebound through the spring. Meanwhile, Canadian employers added almost 300,000 jobs through the first half of the year, keeping the unemployment rate near a record low.
“We have been surprised by the persistence of excess demand and underlying inflation in Canada and globally. We know that higher rates are having an impact, but how big their impact will be is uncertain,” Mr. Macklem told reporters.
Consumer price index inflation has come down significantly, reaching 3.4 per cent in May from a four-decade high of 8.1 per cent last summer. But most of this decline has come from year-over-year comparisons in the price of oil, which spiked after Russia’s invasion of Ukraine last year and has moderated since then.
Core measures of inflation, which strip out more volatile energy and food prices, have been stickier, with three-month rates averaging around 3.5 to 4 per cent. That suggests the next leg down in inflation could take longer than previously expected.
“With the downward momentum in inflation waning and our forecast suggesting inflation will be around 3 per cent for the next year, we are concerned that the progress to price stability could stall, and inflation could even rise again if there are upside surprises,” Mr. Macklem said.
The bank pointed to several factors behind the surprisingly strong demand in the economy, including high population growth, a tight labour market, accumulated savings and spending by federal and provincial governments.
The Bank of Canada raised interest rates to five per cent, hitting the economy with higher borrowing costs as new projections suggest it will take longer for inflation to fall back to two per cent. Bank of Canada governor Tiff Macklem said the bank’s assessment was that the cost of delaying action was larger than the benefit of waiting. (July 12, 2023)
The Canadian Press
Another rate increase means more financial pain for Canadian households, who face higher costs to service their debt.
So far, signs of acute financial strain remain relatively limited, the bank said in a special section of its quarterly Monetary Policy Report, published Wednesday. Delinquency rates are rising but remain below pre-pandemic levels, even for variable-rate mortgage holders who have been squeezed the most by rising interest rates.
But there are some pockets of concern, the bank said.
“Credit card data show that borrowers are using their credit cards more extensively than they have in the past,” it said.
“In addition, although overall delinquency rates on loans remain relatively low, the share of borrowers moving from 60 to 90+ days late on any credit product has risen and is now close to a historical high.”
Many homeowners have been cushioned against rising rates because their lenders have let them extend the amortization periods of their mortgages rather increasing their monthly payments. The bank noted that only one-third of mortgage holders have been affected by higher rates so far.
“As this share increases over the coming quarters, more households will face higher debt-service costs. Mortgage holders with variable-rate fixed payments could be particularly exposed,” the bank said.
The bank’s next interest rate decision is scheduled for Sept. 6.
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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