The Bank of Canada’s decision to hike interest rates earlier this month was underpinned by “surprisingly resilient” consumer spending — a force that shows few signs of abating in the latest retail data.
On Wednesday, the central bank released a summary of its deliberations that led to the quarter-percentage-point rate increase on June 7 following two consecutive decisions to hold the policy rate steady.
The Bank of Canada’s governing council ultimately decided it had seen enough evidence in recent economic data to confirm that its benchmark rate was not “sufficiently restrictive” to get inflation all the way down to its two per cent target, according to a release.
Among the factors that most concerned monetary policymakers were “surprisingly resilient consumer spending.”
Data informing the central bank leading into the June decision showed Canadian consumers continued to spend their money on automobiles, furnishings and other household goods.
This surprised the Bank of Canada’s governing council, the deliberations revealed, amid expectations the interest rates to date to be more of a drag on consumer demand.
Three consecutive months of growth in housing activity and prices also showed the economy was proving more resilient in the face of higher interest rates, per the deliberations.
Governing council floated a few reasons why consumers have proven to be unfazed by higher rates.
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Tighter monetary policy might not be hitting households as hard because of built-up savings, which could extend the typical lag of 12-18 months that it takes for higher rates to be fully absorbed in the economy, it said in its release Wednesday.
Pent-up demand for travel and other experiences from the pandemic was also helping to keep inflation hot on services, the governing council noted.
A tight labour market is meanwhile keeping most Canadians employed and with a steady flow of income, though the governing council said it began to see signs of easing here before raising the policy rate further.
Elsewhere, the Bank of Canada said it was seeing persistently “elevated core inflation” in the latest Consumer Price Index release, which saw headline inflation tick up for the first time in 10 months in April.
While policymakers debated leaving the rate untouched and instead signalling a likely hike at its next decision in July, the governing council said it ultimately agreed they had seen enough evidence to raise rates by 25 basis points in June.
Future monetary policy decisions will be dependent on forthcoming economic data, according to the deliberations.
The next Bank of Canada decision is set for July 12.
Latest retail data reinforces rate hike predictions, economists say
Many economists are already baking another 25-basis-point hike into their forecasts next month, and the latest data released Wednesday shows few signs of weakness in consumer spending.
Canadian retail sales rose 1.1 per cent in April from the previous month, Statistics Canada said Wednesday, outpacing early estimates from the agency. The flash estimate for May showed expectations of further growth.
Randall Bartlett, senior director of Canadian Economics at Desjardins, said in a note Wednesday that the strength in consumer spending was “broad–based” across most subsectors and provinces.
“Today’s retail print just works to reinforce our call that another 25-basis-point hike in July is likely,” he wrote.
BMO economist Shelly Kaushik said in a note that consumer spending is expected to lose momentum in the second half of the year “as yet higher interest rates and still-elevated inflation continue to weigh on purchasing power.”
More key economic data including May inflation numbers and the Labour Force Survey for June are due before the central bank’s next decision.
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