It may seem strange, but the Bank of Canada cannot offer Canadians a reduction in interest rates due to the economy’s strong performance. Economists collectively predict that the Bank will not begin to lower rates until June or July. Why not initiate the cuts immediately?
The majority of Canadians are under the impression that the country is experiencing a recession and requires the economic boost that comes with lower borrowing costs.
Although economic growth is almost unnoticeable, Canada is projected to conclude the year with a commendable GDP growth ranging from 0.8 percent to 1.4 percent.
In fact, the latest forecasts from the International Monetary Fund indicate that Canada’s economy will outperform its advanced economy counterparts in 2025, with a GDP growth of 2.3 percent.
The IMF predicts a 1.7 percent economic growth for the U.S. next year. However, the Canadian economy has been at a standstill since the previous summer, and the cost of housing is excessively high. Equifax, the credit rating agency, reports that total Canadian consumer debt reached $2.4 trillion in the third quarter of last year, according to the most recent data available. This figure is not far from Canada’s total GDP.
Moreover, the trend of corporate layoffs, which was prominent in the tech sector last year, has since spread to the broader economy. In recent months, significant layoffs have been announced by major employers such as Bell Canada’s parent company BCE (approximately 4,800 job cuts), Toronto-Dominion Bank (3,000 job cuts), and gas utility Enbridge (650 job cuts). Therefore, it is not surprising that about 55 percent of Canadians surveyed recently by Maru Public Opinion are concerned about their personal finances.
This is the highest level since Maru started monitoring this key indicator in 2020.
Although it is only a three-point increase from the December survey, the trend is what matters. The fact that managing household expenses has become more challenging provides Canadians surveyed in that poll with ample reason to believe the economy is heading in the wrong direction.
This, in turn, curtails consumer spending and economic growth. The Bank of Canada is relying on sufficient economic weakness to further decrease inflation so that it can conclude one of its most aggressive rate-hiking campaigns in history, which began in March 2022. The Bank is of the opinion that the economy is still too “hot” to risk starting a rate-cutting program.
Until Feb. 9, many economic observers anticipated the first rate cut from the current two-decade-high policy rate of five percent as early as April. However, on that day, they postponed their expectations to the summer.
On Feb. 9, Statistics Canada announced that the economy added 37,000 new jobs in January, more than twice what experts had forecasted. The unemployment rate fell to 5.7 percent, marking the first decrease in unemployment in a year. Additionally, average hourly wages increased by an annualized 5.3 percent. This is a decrease from December’s 5.7 percent but is still significantly above historical averages.
“The BoC shouldn’t even be talking about rate cuts,” says Scotiabank economist Derek Holt. He points to the likely continued wage increases in 2024 as one of the factors contributing to inflationary pressures that are too strong to warrant rate cuts.
Doug Porter, BMO’s chief economist, responded to the Feb. 9 figures by saying: “A decent job gain, a slide in the jobless rate, and persistent five percent wage growth are hardly the stuff of an urgent call for rate cuts.” In November, Porter identified skyrocketing housing costs as the new “chief villain” in inflation. Indeed. High housing costs, particularly skyrocketing rents, now account for most of the remaining inflation in the economy.
The central bank couldn’t ignore the optimistic forecast for Toronto house prices released earlier this month by the Toronto Regional Real Estate Board. TRREB anticipates a 3.5 percent rise in the average Toronto house price, reaching an average of $1,170,000 in 2024, which would be the second-highest level ever recorded. Jason Mercer, TRREB’s chief analyst, stated that 2024 signifies the start of a “multi-year recovery” in the Toronto housing market.
This is not exactly the news the Bank of Canada was hoping for.
Minutes from the Bank’s governing council meeting before its January rate-setting decision reveal the Bank’s worry about a real estate resurgence that “could keep CPI inflation significantly above the (Bank’s two percent inflation) target even as price pressures in other sectors of the economy subsided.”
Tiff Macklem, the Bank’s governor, defensively acknowledges the Bank’s high interest rates’ role in driving up housing costs. However, in a speech in Montreal this month, Macklem went to great lengths to attribute the lack of affordable housing to factors beyond the Bank’s control. These include municipal zoning restrictions, a shortage of construction workers, and economic uncertainty for homebuilders.
Naturally, when everyone is held responsible, problems remain unresolved. It could be beneficial if the Bank provided a schedule for rate reductions — obviously contingent on continued success in taming inflation. At the very least, this would alleviate uncertainty, which is likely the primary obstacle hindering the economy.
