The Bank of Canada has entered the restrictive rate zone for the first time since that other breach of the so-called neutral rate which preceded the Great Recession of 2008.
Everything indicates that this will not be the last turn of the screw before the expected autumn break. By raising its target for the overnight rate by another 75 points, to 3.25%, the central bank was unequivocal. In Canada, “aside from gasoline, inflation has picked up, and the data indicates that price pressures have become more broad-based,” while “the Bank’s core inflation measures continued increase to between 5 and 5.5% in July”. Above all, “surveys indicate that short-term inflation expectations remain elevated. And the longer they stay, the more high inflation is likely to take root.
The central bank maintains that even if the repercussions of its monetary austerity are already being felt with, in particular, a slowdown in growth in May and June to be followed by an expected contraction in July, “the Canadian economy remains in a excess demand and labor markets remain tight. Thus, “given the outlook for inflation, the Governing Council still considers that the key rate will have to increase further […]. As the effects of tighter monetary policy become more evident, the Bank will assess how much further interest rates will need to be raised to bring inflation back to the “target” of 2%, the statement read.
Analysts are now expecting a key rate to rise above the so-called neutral rate in the 2-3% range – i.e. the rate compatible with production that remains at its level for a long time. potential and an inflation rate remaining on target — translates into a slower rate of increase in the cost of interest. With, in sight, a scenario foreseeing for the moment a moderate recession beginning at the end of 2022 or the beginning of 2023. And if many of them link the expected recession to the degree of severity of the ongoing correction in the residential real estate market, the Bank of Canada rather retains that “higher mortgage rates are causing the housing market to decline, as expected, following the period of unsustainable growth recorded during the pandemic”.
It has already been said that the institution must pilot with one of the most interest-sensitive economies of the G20. It wants to avoid an unanchoring of inflationary expectations likely to generate a wage-price spiral, while maneuvering in a context of high household indebtedness and a real estate correction.
Inflation and rates at work
Meanwhile, inflation as well as the previous four key rate hikes since March continue their impact. Equifax Canada reported on Tuesday that in the second quarter, credit card balances reached their highest level since the fourth quarter of 2019. According to the rating agency, the main change observed in consumer credit concerns people with a lower credit score. “Credit card balances for consumers with credit scores below 620 increased 7.4% from the first quarter of 2022 and 16.2% from the second quarter of 2021.”
On the mortgage side, the volume of new loans fell 16.4% in the second quarter from the peaks reached a year earlier. In contrast, first-time homebuyers’ average loan size fell only 0.5% between the first and second quarters, and their average monthly payments rose 10%.
Insolvency cases also hit their highest level since the start of the pandemic in the second quarter. This is mainly due to consumer proposals, which increased by 20.7% over the previous year and represent 76% of all insolvency cases. The agency also measured a 4% increase in default rates of 90 days and more, the third quarter in a row where an increase has been observed.
The trend continued in July. The Office of the Superintendent of Bankruptcy reports that the total number of insolvency cases filed increased 19.1% from July 2021, with increases of 18.4% among consumers, and 45% among businesses .