CPA Canada chief economist argues that now is not the time to hike rates again
The Bank of Canada has stated that its direction on interest rates will be driven by data, but when there is conflicting evidence informing its decisions, which way will it go?
This will be answered in the near-term next week then the latest rate decision is announced and if you were to just take three key pieces of data, a further hike is looking likely: stronger-than-expected rebound of inflation in July, wage increases above 4% year-over-year, and house prices rising again.
But these signs of economic strength cannot be the deciding factor according to the chief economist of CPA Canada, David-Alexandre Brassard. He argues that these metrics do not provide a strong enough basis for another rate hike.
“Strong population growth is contributing to inflationary pressures and is masking the economy’s underlying weaknesses,” he says.
In an economic update, the economist points to CPA Canada’s recent debt survey which shows that 71% of consumers with debt think a rise in interest rates would make it challenging to keep up with their payments.
Along with declining retail sales on a per capita basis and rising consumer insolvencies, the evidence against another rate hike is building.
But what about the rising house prices?
Although 40% of homes are more expensive despite higher interest rates, CPA Canada’s Debt Dilemma survey reveals that almost half of those with a mortgage are struggling to maintain their home and 43% are finding it hard to pay their mortgage. Delinquency rates remain low, but this has been helped by longer amortization periods.
Economy is bigger but not better
Finally, Brassard addresses the most recent GDP data which shows consistent growth since early 2022.
He says that it has not grown on a per capita basis and may even show a decline when the latest stats are unveiled today (Sep. 1), while the labour market is showing slower job growth and rising unemployment.
The Bank of Canada will announce its interest rate decision on September 6, 2023.
