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Bank of Canada should not be trigger happy to raise interest rates

canadian-real-estate-markets

Ending May 2017, on a YoY basis, the consumer price index (CPI) grew 1.3%, slightly down from the previous month rise of 1.6%.  This has occurred in the backdrop of a correcting crude oil market, which has witnessed prices plateauing during the onset of 2017, before ultimately developing a negative gradient.  It mustn’t be forgotten that historically crude oil trade has been the mainstay of the Canadian economy and subsequently macroeconomic indicators.  Quite impressively, though, the economy grew at a rate of 3.7% during Q1 of 2017, but growth in Q2 is expected to be slower in the region of 3%.

Canadian CPI

As already stated, economic performance stays correlated to the crude oil price movements, which were on an uprise during most of 2016, and ever since the dawning of the current year has tapered.  With a certain lag, the performance of the Canadian economy followed a similar course, and lately, it appears lackluster, thus underscoring the reliance of Canadian economy on the crude oil market.  From a holistic standpoint, the performance of the economy remained under-par, even though consumer spending has been resilient.  In reality Bank of Canada’s hawkish approach, which is eyeing interest rate hike decision as early as July, does not seem justifiable.  The bank policy rate stood at 0.5% during 2015, which followed rate cuts in light of flailing crude oil export market, and the Canadian currency, loonie, collapsed in the aftermath.  However, there have been ameliorating impacts on the economy as well as consumer spending has increased and as per recently released data, sales of building material, garden equipment, and supplies sector has risen by 3.5%, which is the strongest in the last 2 years.  Further consumer spending increase is underscored by the fact that sale of home appliances and hardware has grown over eight consecutive months.  In addition, Canadian housing market has been generally robust but only slowed down in the metropolitan city of Toronto after the imposition of foreign buyers tax, is an apparent effort to rein in the market.

A point of concern for the Canadian economic growth, as per Canadian Centre of Policy Alternatives (CCPA) is the racking up of corporate debt to the tune $1 trillion.  As per their report, Canada is at the forefront in terms of private debt accumulation when compared to all the advanced economies.  This is not good for consumers, because excessive debt results in scaling down of corporate operations, or curtailment of expansions, which results in a cut in expenditure in plant and equipment.  Thus, the required plow back effect in the economy is lower, resulting in lesser job creation, and ultimately lowered disposable income brought about with stagnating wage rates.  This ultimately manifests itself in economic indicators failing to meet their required macroeconomic objectives, inflationary target certainly being one. Thus, corporates need to take their fair share of onus, and as recent evidence suggests, they should refrain from losing focus by investing in unrelated ventures such as real estate, which has is the case as of late.  This issue here becomes two folds, first it inflates the real estate sector, primarily the housing market, to unsustainable levels, but more importantly, the resources that would have been better utilized in creating jobs and uplifting wage rates, allowing for a sustainable long-term growth, are diverted into ventures which give rise to market instability.  For example, it is envisaged that rising interest rate could mean a cost base increase of $130/month for the average Canadian, which would have been better buffered if wage rates outweighed this increased cost of living, leading to long-term sustainability.

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