While businesses are hiking prices, leading economists believe rates are taking effect
Canadian business sentiment weakened in the third quarter according to the newly released Bank of Canada Business Outlook Survey but will it change the bank’s policy on interest rates?
With a broad slowdown in activity and expectation of slower inflation it would appear that the central bank’s inflation targeting policies are working and suggest a further pause in rate hiking at its October 25 meeting.
But the cost of doing business takes time to filter through and most businesses told the survey that their pricing policies are still abnormal, although this should begin to balance out in the months ahead.
Additionally, wages remain elevated as labour shortages remain challenging to businesses desperate to attract and retain the talent they need, while tighter credit conditions may mean lower investment in the next year.
Many firms expect that getting inflation to the 2% target will take longer than three years.
Leading economists have given their opinions about what may be ahead, based on the latest Business Outlook Survey (BOS).
BMO
BMO Economics’ economist Shelly Kaushik says that the BOS and the BoC’s Survey of Consumer Expectations point to rate hikes are doing the job of slowing activity (and inflation) as intended.
“However, policymakers will take note that inflation and wage expectations remain well above target and are only receding slowly,” she said. “The broadly downbeat tone of these surveys support our call for the bank to remain on hold, with a tightening bias, at next week’s meeting.”
RBC
At RBC Economics, Clare Fan also expects the BoC to freeze rates for now.
“The contrast between slowing economic activity and more persistent price pressures in Canada was apparent again in the Bank of Canada quarterly survey results,” she said. “Elevated inflation expectations on the part of consumers and persistently abnormal price-setting behaviour reported by businesses will be concerning for the Bank of Canada,” but with policymakers considering the lag between inflation and the economic cycle, a hike should not be needed.
National Bank
At National Bank, Taylor Schleich & Warren Lovely noted that the BOS hinted at stagflation which is problematic for the central bank.
Aside from CPI data released after their commentary, the economists believe further hikes may be necessary due to excess demand, inflation expectations, labour costs, and corporate pricing.
