Bank of Canada must stop rate hikes, says leading economist

Ahead of that of the Bank of Canada This Wednesday, an economist from one of the country’s six largest banks is urging the central bank to stop raising interest rates. He calls the recent rate hikes “unnecessary” and states that consumer spending remains lower than just before the pandemic hit.

“History might show that the Bank of Canada’s recent rate hike (and all subsequent moves) was unnecessary at best and a mistake at worst,” said CIBC senior economist Andrew Grantham. in a report.

Last March, the Bank of Canada launched an aggressive rate hike campaign to curb inflation, which rose to 8.1 percent. In several steps, the Bank raised its main overnight interest rate from 0.25 percent to 4.75 percent. The central bank’s last hike in June brought overnight interest rates 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 down prices and slowing down the economy.

Although inflation fell sharply in May from 4.4 percent in May to 3.4 percent, inflation remains above the Bank’s target of 2 percent. And inflation in some sectors – including the travel industry – is still persistently high.

That means the bank will be tempted to raise rates at its Wednesday meeting, according to economists, and markets are predicting a more than 60 percent chance of another rate hike.

In the summary of the central bank’s deliberations — or minutes — of the policy meetings leading up to the latest rate hike, the Bank said interest rates should not yet be restrictive enough to sufficiently curb demand, as both growth and inflation were stronger than expected. This actually led to the rate hike of 25 basis points realized last month.

But Grantham told the Star that “more patience is needed” from the central bank, as it’s possible that past rate hikes are already slowing consumer spending more than the bank perceives. “But we focus too much on growth rates rather than consumer spending levels.”

In his report, Grantham looked at inflation-adjusted spending on items and sectors most sensitive to interest rates — including home appliances, cars, travel services and restaurants — and found that spending in such areas “has risen nearly 15 percent since last year’s delivered the first walk.

However, Grantham said that current consumer spending is still lower than it was before the pandemic, suggesting that “much of the consumer spending growth we’ve seen lately is a normalization of spending activity and people are able to go back to restaurants. to go on holiday again’ instead of ‘excess demand’.

According to the report, “the level compared to 2019 tells a very different story, as the volume of spending in these interest rate sensitive areas is still one percent below the level of the fourth quarter of 2019.”

That would be “even worse on a per-capita basis given the strong population growth seen recently, and represents a shortfall of about 10 to 15 percent from the pre-pandemic trend.”

In the first three months of 2023, the country’s population grew by more than 290,000 people, or 0.7 percent, the highest quarterly growth rate for at least half a century when comparable data became available in 1972.

“We are still well below the level of consumption we would have had if the pre-pandemic path had continued,” said Grantham. “And that suggests that even the rate hikes in the past had an effect.”

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