Businesses are still anticipating passing on larger price hikes to consumers, even as the Bank of Canada’s efforts to control inflation appear to have stalled, according to the central bank’s latest surveys. The quarterly business outlook surveys, released on Monday, reveal that approximately half of businesses report that their pricing practices are not yet back to normal following a year and a half of interest rate increases aimed at curbing inflation. Despite this, businesses are still planning to implement larger and more frequent price increases than before the COVID-19 pandemic. However, businesses do expect prices to rise at a slower rate as pressures on input costs ease. The Bank of Canada has flagged its desire to see a normalization in businesses’ pricing behaviors as it considers whether further interest rate increases are necessary to reach its two percent inflation target. The next interest rate decision is scheduled for October 25.
The surveys also indicate that businesses’ inflation expectations are decreasing slightly due to the rapid increase in interest rates since March 2022, which has helped to tame price pressures. However, inflation expectations remain high, with many businesses expecting that it will take longer than three years to bring inflation back to target. A separate survey of consumers also released on Monday shows that Canadian households have high expectations for inflation in the coming year, with many believing that the impact of higher interest rates is far from over.
The business survey also reveals a worsening outlook for Canada’s economy, with the Bank of Canada’s key indicator for business confidence reaching its lowest level in over a decade. Many businesses are reporting slower sales growth, with a third reporting outright declines. A third of the firms surveyed expect a recession in the next year, which aligns with the sentiments expressed in the previous quarter. On the consumer side, 55 percent of respondents are now expecting a recession in the next year, up from 50 percent in the previous quarter. The surveyed businesses attribute the slowdown in consumer spending on discretionary goods and a cooling in the real estate market as factors driving down demand. Although hiring intentions are below historical averages, only a small percentage of firms expect to reduce the size of their workforce in the coming months.
The Bank of Canada expects wage growth to remain high but ease in the coming year. Firms still anticipate making higher-than-normal wage increases over the next year, even though wage pressures are starting to ease. The consumer survey shows that workers’ expectations for wage growth have reached a new high, despite recent signs of easing. Workers remain confident in the labor market and intend to ask for higher wages to offset the impact of inflation and rising interest rates.
The Bank of Canada’s rate hikes, totalling 4.75 percentage points thus far, are causing increasing anxiety among Canadian homeowners. According to the survey, 39 percent of respondents with mortgages say they are at or near the limit of what they can afford to pay. Variable-rate mortgage holders are particularly affected by rising interest rates, as their payments increase or decrease in line with the central bank’s policy rate. The survey also shows that homeowners with variable-rate mortgages are more negatively impacted by rate increases compared to those with fixed-rate mortgages. Despite the pressure on homeowners, the Bank of Canada noted that most still believe they can meet higher payments at renewal and have a low likelihood of defaulting on their debt.
Economists predict that the Bank of Canada will keep interest rates steady at its upcoming decision on October 25, unless there is a significant upward surprise in the consumer price index data for September. The central bank will receive fresh inflation data on Tuesday before making its decision. The surveys indicate that the Bank of Canada’s rate hikes are having the intended effect of slowing demand in the economy, but there are lingering issues that could complicate future interest rate decisions such as elevated inflation and wage expectations.
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