After eight consecutive rate hikes, the BoC said it would pause its monetary policy tightening campaign and not raise rates again if inflation falls as expected. The BoC left its key overnight rate unchanged at 4.5%, down significantly from the peak of 8% in June 2022. However, bank officials said interest rates may need to remain high for some time due to wage pressure amid the tight labour market and high service prices. Canada's inflation rate fell to 4.3% in March, the lowest in 19 months after peaking at 8.1% in 2022. The BoC expects that inflation will fall to 3% this summer even as the economy continues to grow modestly and will then slow down to 2% by the end of 2024. At its meeting last month, the BoC officials considered a rate hike because the labour market has been tightening continuously and the growth was stronger than expected.
According to Governor Macklem, if the global financial stress re-emerges, the spill over to Canada could be even more significant. If more serious tensions emerge in Canada, the BoC the tools in place to provide liquidity while continuing its efforts to stabilise consumer price, he added. Macklem also said there is now a risk that these adjustments will take longer or be delayed, and inflation will be stuck above the 2% target.
Canada's growth in the first quarter of 2023 came mainly from a strong recovery in January, when strong labour demand and warm weather boosted many activities after a long period of stagnation. However, this recovery trend did not last long due to the impact of the BoC's tightening monetary policy to cool down inflation. According to Statistics Canada, Canada's GDP in March fell 0.1% following two consecutive months of growth at 0.6% and 0.1%. As can be seen, the Canadian economy has been declined since the beginning of the year. However, for the whole first quarter, the Canadian economy still grew by 2.5% compared to the low base in the same period in 2022.
After a long period of being pent-up due to the COVID-19 pandemic along with continuously rising interest rates, many Canadian households have been tending to spend more comfortably since the pandemic ended, and the BoC has stopped its rate hike roadmap. However, according to experts, the impact of high interest rates always has a lag so the later the family feels more clearly about financial difficulties. Meanwhile, businesses have been heavily affected due to increased financial costs while market demand declines in both domestic and export markets.
Governor Macklem acknowledged that high interest rates are reducing household spending, especially on luxury goods. Many families are having trouble making mortgage payments, while businesses are cutting their investment due to weaker consumer demand. Therefore, Canada's GDP is forecast to continue to contract in the last months of the year before its recovery in 2024.
According to a report released by the Royal Bank of Canada (RBC), consumers’ defaults in Canada will increase over the next few years as indebted households grapple with rising borrowing costs and an increased unemployment rate. The ratio of Canadian household debt-to-income was around 180.5% in the fourth quarter of 2022, on par with the pre-COVID period.
According to experts, if the BoC continues to raise interest rates, it will create more very bad effects on Canada's economy. Most analysts in the private sector predict that the Canadian economy is likely to shrink slightly by the end of 2023, as high interest rates affect economic activities. In addition, the prolonged strike of 150,000 federal workers has also been putting pressure on the economy.
