Businesses are still expecting to pass on bigger price hikes to consumers amid fears the Bank of Canada’s inflation fight has stalled, according to the central bank’s own surveys.
Roughly half of businesses say their pricing practices are “not yet back to normal” after a year and a half of interest rate hikes designed to tamp down inflation, the Bank of Canada’s quarterly business outlook surveys released Monday show.
“On balance, firms are still planning to make larger and more frequent price increases than they did before the COVID‑19 pandemic,” according to the surveys.
Businesses do largely expect that their prices will rise at a slower rate than in the past year as pressures on their own input costs ease.
The Bank of Canada has flagged that it is looking for a normalization in business’ pricing behaviours as it weighs whether interest rates will need to rise further to get inflation all the way back to its two per cent target.
The Bank of Canada’s next interest rate decision is set for Oct. 25.
Firms’ inflation expectations are edging lower as the rapid rise in interest rates since March 2022 helps tame price pressures, the Bank said Monday. But inflation expectations “remain high,” the central bank added, with many businesses expecting it will take longer than three years to get inflation back to target.
A separate survey of consumers also released on Monday show that Canadian households still have high expectations for inflation in the coming year, with many believing the impact of higher interest rates “are far from over.”
CIBC senior economist Andrew Grantham said in a note on Monday that the pair of surveys suggest the Bank of Canada’s rate hikes are working to slow demand in the economy.
But he added the reports also point to “lingering issues” that could keep inflation “sticky” and complicate the central bank’s upcoming interest rate decision.
Bank of Canada Governor Tiff Macklem said last week officials would weigh whether to let previous hikes work through the economy, or raise rates again to counter inflation.
One-third of businesses expect recession
The business survey shows a worsening outlook for Canada’s economy.
The Bank of Canada’s key indicator for business confidence has now reached its lowest level in more than a decade, except for the early days of the COVID-19 pandemic.
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Many businesses are reporting slowdowns in sales growth, with a third reporting outright declines, according to the survey. One-third of firms surveyed indicated they expect a recession in the next year, which was on par with sentiments in the previous quarter.
On the consumer side, 55 per cent of respondents are now expecting a recession to hit the economy in the year ahead, up from 50 per cent in the previous quarter.
The surveyed businesses indicated slowdowns in consumer spending on discretionary goods and an overall cooling in the real estate market were driving down demand.
While hiring intentions are below historical averages, only a “small share” of firms are expecting to reduce their size of their workforce in the coming months.
By and large, businesses surveyed by the Bank of Canada expect wage growth will remain high but ease in the coming year. The central bank has identified hot wage growth as another area it’s watching to see if price pressures will continue to cool in the months to come.
“Although wage pressures are easing, firms still expect to make higher-than-normal wage increases over the next year,” the Bank’s survey said.
The consumer survey, meanwhile, showed workers’ expectations for wage growth reached a new high for the survey. Despite recent signs of easing, workers remain confident in the labour market, the central bank said, and intend to continue asking for higher wages to offset the impact of inflation and rising interest rates.
Mortgage payments put two in five homeowners close to edge
The Bank of Canada’s rate hikes, totalling 4.75 percentage points so far this tightening cycle, have a growing number of Canadian homeowners feeling particularly on edge.
Among those with mortgages who responded to the survey, some 39 per cent said they were above or close to their maximum affordable mortgage payments.
The survey shows that those with variable-rate mortgages are particularly hit hard by rising interest rates, as their payment rises or fall in line with the central bank’s policy rate of 5.0 per cent.
Some 85.1 per cent of homeowners with variable-rate mortgages said they’ve been negatively impacted by rate hikes compared with just over half of those with fixed-rate mortgages, who renew into the higher rate environment when their existing term expires.
Despite the growing pressure on homeowners, the Bank of Canada said “most still believe they can meet higher payments at renewal and think the likelihood they will default on their debt is low.”
BMO economist Shelly Kaushik said in a note to clients on Monday that expectations for a slowdown in the pair of surveys show the Bank of Canada’s “aggressive rate hikes are working as intended,” though policymakers will “take note” of elevated inflation and wage expectations.
She said she expects the central bank will remain on hold next week with a bias for further “tightening” if progress stalls.
The Bank of Canada will also get a look at fresh inflation data on Tuesday before making its decision next week.
TD Bank economist Maria Solovieva also said in a note Monday that she expects the Bank of Canada will keep rates steady on Oct. 25, “barring a significant upward surprise” in the consumer price index data for September.
— with files from Reuters
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