Posthaste: Risks grow that the Bank of Canada will wait too long to pull the trigger on rate cuts
The Bank of Canada runs the risk of depressing an already fragile economy by waiting too long to cut interest rates, says a report from Moody’s Analytics.
Two years after the central bank began raising interest rates to curb soaring inflation, the timing of its next move has become critical, it said.
The Bank of Canada held steady at 5 per cent earlier this month for the fifth meeting in a row, saying core inflation remains a concern and stressing that it was too early to talk about rate cuts.
The Bank’s “still-hawkish tone” quashed speculation of an April cut, but June remains on the table.
The analysis by Moody’s senior economist Brendan LaCerda says the Canadian economy is clearly showing the strain of higher interest rates. Consumers have pulled back on their spending as homeowners renewing mortgages absorb steep payment increases and those who have yet to renew sock away savings.
Mortgage performance remains historically strong but delinquencies have been rising in recent months and charge-off rates on credit cards are back to pre-pandemic levels, the report said.
Businesses too are reducing investment and hiring and the number filing for bankruptcy has started to climb.
“This economic state entails significant risk,” said LaCerda. “The current equilibrium is fragile. Should business sentiment suddenly turn more pessimistic, a swell in layoffs would convince consumers to retrench more severely, quickly sparking a downward spiral into recession.”
So far the labour market has held up, but growing slack will depress wage growth into 2024, removing a key support for consumers, he said. The strong economy in the United States that boosted exports and offset domestic weakness is also expected to slow.
“With these supports
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