Posthaste: Bank of Canada rate hike 'at best unnecessary — at worst a mistake,' says CIBC
A Big Six bank economist is calling on central bankers to stop hiking interest rates, labelling the last increase and any others to come as “unnecessary at best” because policymakers are misreading the tea leaves on consumer spending.
The Bank of Canada surprised a good chunk of Bay Street at its June 7 rate announcement when it increased the benchmark rate that other lending is based on 25 basis points to 4.75 per cent, citing excess demand in the economy as one of its main reasons.
The central bank is scheduled to announce its next rate decision next week on July 12. Naturally, consumers and investors are on high alert, with markets currently pricing in a 55-per-cent chance of another increase.
“History could show that the recent Bank of Canada rate hike (and any subsequent moves) was at best unnecessary, and at worst a mistake,” Andrew Grantham, a CIBC Capital Markets economist, said in a note on July 3.
He said it’s possible previous rate hikes have already started to tame consumer spending a lot more than the Bank of Canada realizes.
Grantham looked at interest rate-sensitive sectors such as household appliances, furniture and autos — all hit by supply chain snarls during the pandemic — as well as travel services and restaurants, which were shattered by COVID-19 restrictions.
He calculated that consumption in these sectors, adjusted for inflation, increased almost 15 per cent since the first of the Bank of Canada’s eight consecutive rate hikes starting in March 2022. Grantham said the last time the bank hiked rates, in 2017 and 2018, spending in these areas had already started to fall.
But, shift the timeline to before the pandemic, and current spending is still one per cent lower than it was in the fourth quarter
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