By Paul Vieira
OTTAWA–Inflation expectations among businesses and households remain elevated, with the combination of wage gains and shelter costs anticipated to keep annual price increases at higher-than-normal levels in the short term, according to fourth-quarter surveys released by the Bank of Canada.
The surveys, released Monday, painted a portrait of a stagnant economy, in which consumers intend to curtail spending, and businesses put a lid on hiring. While the results highlight the strain higher interest rates are imposing on activity, analysts say Bank of Canada officials are likely to wait for more evidence before considering cutting its policy rate, which is at a 22-year high.
More than half of companies, 54%, believe inflation will remain above 3% over the next two years, the central bank’s business-outlook survey said–a level largely unchanged from the previous quarter. Consumers suggested inflation has decelerated but near-term expectations remain elevated–with the median response among households indicating they believe inflation will hover near 4% over the next two years.
“Wage growth is expected to ease only gradually. Partly because of this slow easing, firms expect inflation to remain above the Bank of Canada’s 2% target for some time,” the central bank’s quarterly business-outlook said. The latest labor-market data from Statistics Canada indicated average hourly wages in December rose 5.4% from the same year-ago period.
In the separate consumer survey, the central bank said that “persistently high expectations for services such as rent may be slowing progress in returning overall inflation expectations to where they were before the Covid-19 pandemic.” Rent costs in Canada rose at their fastest pace in the fourth quarter in four decades.
The Bank of Canada’s mandate is to set rate policy with the aim of achieving and maintaining 2% inflation. November’s inflation report indicated that prices rose 3.1% that month from a year earlier, higher than market expectations.
The business-outlook and consumer surveys were conducted in November and December. The findings provide senior Bank of Canada officials with data they closely review before issuing its next interest-rate decision–which is scheduled for next week, on Jan. 24. The Bank of Canada kept its benchmark interest rate unchanged at 5% in December, and senior officials–among them Gov. Tiff Macklem–said afterward that it was premature to begin discussions about rate cuts.
Minutes summarizing the deliberations among senior officials ahead of December’s rate decision indicated there were worries that upside risks, such as high shelter costs and elevated wage gains, could thwart efforts to reach 2% inflation.
Inflation expectations in Canada “remain stubbornly high,” said Benjamin Reitzes, economist at BMO Capital Markets, about the survey’s findings. “We’ll need to see inflation expectations move down further before policymakers are willing to cut rates.”
According to the business-outlook survey, the near-term outlook for sales was subdued, noting indicators of future sales have deteriorated compared with a year ago. Nearly 40% of companies suggested the overall level of sales volumes declined over the past year. Half of firms surveyed expect sales volume to increase over the next 12 months, versus 30% who anticipate a decline.
However, some firms said they were concerned about the health of the Canadian consumer, citing a wave of mortgage renewals–totaling about 700 billion Canadian dollars, or the equivalent of $522 billion–over the next two years at higher rates. The consumer survey indicated about two-thirds of households intend to reduce their spending due to inflation and interest-rate expectations.
“Consumers expect interest rates to remain high and their real wage growth to be weak,” the consumer survey said. “As a result, an increasing share said they are pulling back on spending plans.”
The business-outlook survey indicated about half of firms don’t intend to add to their payrolls, and an increasing share of companies “are planning to make modest reductions in staffing.” Job growth in Canada has slowed markedly over the past six months, and the unemployment rate has climbed 0.8 percentage points, to 5.8%–although still relatively low by historical standards.
And the share of companies having difficulty accessing credit “is notably higher” than before the Covid-19 pandemic, according to the survey. Roughly three-quarters of firms surveyed said they are being negatively impacted by higher interest rates.
Write to Paul Vieira at [email protected]
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