Posthaste: Bank of Canada expected to hold interest rates, but be prepared for surprises

financialpost.com:

Signs are growing that Canada’s economy is slowing under the weight of higher interest rates, but is it enough for the Bank of Canada?

The central bank makes its latest rate decision Wednesday, and a batch of data out last week supports a hold at 5 per cent, say economists.

Inflation numbers for September were a welcome relief, coming in below expectations. These were followed by retail sales on Friday that showed consumers were pulling back on spending. The Bank of Canada’s own outlook surveys also showed weakening sentiment among consumers and businesses.

“From the Bank of Canada’s perspective, there is evidence in these surveys to suggest that economic conditions are cooling, which should help them achieve their inflation target,” said TD economist Marc Ercolao.

The contraction in second-quarter gross domestic product was much weaker than the Bank’s forecast and third quarter looks little better, said Stephen Brown of Capital Economics.

The Bank may also be concerned about recent developments in the housing market. Capital is forecasting a 5 per cent decline in home prices over the next six months, as new listings surge and buyers, wary of higher borrowing costs, stay on the sidelines.

“That risks even weaker GDP growth than we forecast and, as house prices feed directly into the CPI, is another reason to expect core inflation pressures to ease in the coming months,” said Brown.

Another indicator that interest rates are working as intended is higher savings rates, said CIBC chief economist Avery Shenfeld. Though not as high as during pandemic lockdowns, savings rates are well above pre-pandemic levels as Canadians receive a greater reward for saving than spending amid higher rates.

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