Economic Update – October 25th, 2023

Economic Update – No Rate Change Expected

Summary: Interest rates are expected to stay the same next week as inflation dipped more than expected.
On October 25, 2023, the Bank of Canada (BoC) is *expected* to keep interest rates the same.

I don’t usually like to predict what’s going to happen but not only did headline inflation fall, but so did some of the core inflation measures on a year to year basis. Furthermore, the weak Business Outlook Survey completed by the BoC suggests our high rates are having an effect on business’s hiring and buying expectations, which is exactly what the BoC wants to see.

The survey was interesting… the perception of inflation remains above actual inflation. What this means is that people think that things are costing more than they actually do. This is good because it may make businesses and consumers less likely to purchase, allowing our economy to slow gradually.

OK so some musings from the help of Ben Tal, CIBC’s chief economist:
The government is trying to force us into a recession!

They want people to lose their jobs but they can’t really say this… The BoC states that “we need to stop inflation and we’re aiming for a soft landing”: but what that really means is that we need people to start spending less money. The way that the economy as a whole starts to spend less money is by earning less. In many cases, a decrease in job vacancies would provide for less money in the economy as a whole due to fewer job openings and higher likelihood of a depression in wages.

Many people (media and economists alike) stated that we should have already been in a recession. But what’s a recession? Two consecutive quarters of negative GDP… But is that really something that matters to the every day Canadian?

A real recession is where there’s blood in the labour market – where there are job losses. This really hasn’t happened yet, and wages are still growing.

So why haven’t we experience a recession yet? Mostly because of the consumer! The average consumer was flush with money. In Canada, there was $160B of excess savings due to Covid; we just didn’t spend money, not to mention the billions provided in relief for Canadians and Canadian business.
However, recently Ben Tal is saying that we’ve been utilizing our savings to an extent where our savings have dwindled and people have reintroduced their credit cards. There is even an uptick in consumer delinquencies, such as car loans and credit cards.

Interesting…

It’s important to note that inflation is a lagging indicator. What this means is that the inflation numbers that come out from previous data and current data, or what’s happening on the ground, is generally different from the reality on the gound. So, with inflation coming down, and decreasing 3 out of the last 4 months, it should be safe to assume that no rate hike is imminent.

We’d like think that the BoC is a rational player, but we’re all human and so are the decision makers on rate changes… The BoC has stated, time and time again, that their aim is to decrease inflation down to the 2% mark. If the BoC had to choose between a recession or inflation, they will take a recession every. single. day. It is easier and within their power to correct a recession than bring down inflation.

All of this is to say that Canada is one “good news” moment away from another rate hike. It’s possible that wages and the economy pick up next month and December 6th rate announcement could be an increase. Additionally, Canada must look to their neighbour in the south and unfortunately follow their rate hikes so that our dollar does decrease vis-a-vis the American dollar (if our rates are much lower than rates in the States, the money will move out of Canada and decrease the value of Canadian currency – and we don’t want that).

Notwithstanding, according to Bloomberg News calculations, “A three-month moving average of underlying price pressures that Governor Tiff Macklem has flagged as key to policymakers’ thinking fell to an annualized pace of 3.67%, from 4.29% a month earlier.”

Dr. Sherry Cooper, DLC Chief Economist, stated that “while this is still well above the Bank’s 2% target, the global economy is slowing, the Canadian and US economies are slowing, and with any luck at all, the Bank of Canada might see inflation move to within its target range next year. However, the central bank will be cautious, refraining from rate cuts until the middle of next year. The full impact of rate hikes has yet to be felt. The next move by the Bank of Canada could be a rate cut, but not until next year.”

To reiterate, at this time, all fingers are pointing to no rate change on October 25th.
I’m on board with that..!

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