Deputy governor explains what’s made the central bank cautious
When the Bank of Canada announced that it was holding interest rates steady on Wednesday few were surprised at the news.
But the real story was not in the rate freeze at 1.75% but in the reasons behind that decision that reveal the state of the Canadian economy as the central bank reads it.
Speaking Thursday at the Hamilton Chamber of Commerce, BoC deputy governor Lynn Patterson said that a key factor in the decision was the slowdown in consumer spending in recent months, which had been more significant than expected.
Consumer spending is lower
Consumer spending has been a key economic driver for some time but the BoC was not expecting the pace of buying and borrowing to continue.
A slowdown in the housing market, mortgage and other borrowing, and non-essential spending on items such as vacations and cars, has meant households contributing less to the economy than expected – and the BoC needs to discover why.
“Household spending was lower than we expected in the fourth quarter, with categories more sensitive to interest rates continuing to soften.…To better determine the factors at play, we will need more data,” deputy governor Patterson said.
People are feeling less wealthy
Ms. Patterson said that even though most Canadian households are coping with the debts, the impact of higher interest rates is painful for many. That has been shown by rising delinquency rates.
Higher rates are only one part of the weaker household spending though.
The deputy governor said that disposable income grew more slowly last year, global trade disputes have caused uncertainty, and the cooling housing is making people feel less wealthy.
Weaker first half of 2019
Growth in the first half of 2019 is set to be weaker than previously forecast, Ms. Patterson noted, although the labour market is strong and wages are rising.
But the BoC needs more time to see what’s happening and will make an updated forecast when it announces its next rate decision in April.
“Although we figured the economy was in for a detour at the end of last year, that detour may wind up being longer than we had expected.…With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets and global trade policy,” deputy governor Patterson said.
