Ex-Bank of Canada governor Poloz sees cracks in consumer resilience
Former Bank of Canada governor Stephen Poloz says inflation is likely to cool faster than people are expecting, opening the door for lower interest rates.
The economist, who led Canada’s central bank from 2013 to 2020, said the country’s stronger-than-expected growth in the first half of the year was driven by population increases and the resolution of unique supply shocks from the pandemic. An early year jump in household spending was likely a mirage, he said, driven by savings built up during the COVID-19 lockdowns.
“I don’t think the consumer is as resilient as the data will make them look,” Poloz said.
Canada’s economy grew at a 3.1 per cent annualized pace in the first quarter, which many analysts interpreted as proof that interest rates should rise further. Governor Tiff Macklem and the central bank’s policymakers did exactly that, boosting rates in June and July to bring the overnight lending rate to five per cent, the highest since 2001.
Poloz didn’t criticize the central bank or his successor. But he said it’s “just arithmetic” that Canadian households, which carry record levels of debt, will be more sensitive to higher rates than before the 2008 financial crisis.
Many already started trimming spending last year, he said. It’s just taking a while for the bite of higher borrowing costs to fully show up in the data.
For example, Canadian auto sales have been up every month this year. Some might view that as evidence rate hikes aren’t working, but Poloz said it likely reflects decisions made in 2022 to buy cars that couldn’t be delivered until 2023. Now, those cars are in garages, and consumers are feeling the weight of financing them.
The former governor also cautioned that Canada’s low unemployment rate — 5.5 per
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