BANK OF CANADA
will be guided by how well households are adjusting to the higher interest rates, given their high levels of debt.
So far, the bank said Canadians have been making spending adjustments in response to earlier rate hikes and stricter mortgage policies — and credit growth continues to moderate. Household vulnerabilities — while still elevated — have edged down as a result, it said.
“You always need to see more data because it’s still relatively early days, but they seem to be adjusting as we had expected,” senior deputy governor Carolyn Wilkins said.
“I think higher interest rates are always difficult when people haven’t seen them in a long time.”
Poloz said he understands rate increases can be difficult for some people, but he argued the economy is running at its capacity and no longer needs stimulus.
“It’s our job to prevent the thing from overheating and creating inflation pressures down the road,” he said.
Until the hike Wednesday, the interest rate hadn’t been above 1.5 per cent since December 2008. At that time, during the financial crisis, the bank made a three-quarter-point cut to the benchmark, bringing it to 1.5 per cent from 2.25 per cent.
Moving forward, the bank predicts the economy to remain solid. Consumer spending is expected to continue expanding at a “healthy pace,” thanks in large part to the steady rise of incomes and the strength of consumer confidence.
It projects exports to keep growing at a moderate clip, even though they will face limitations from several factors — including transportation capacity constraints, global trade uncertainty and stiff competition, particularly from the U.S.
The report predicted business investment — outside the oil and gas sector — to expand due to solid domestic and foreign demand.
The bank noted, however, that Canada is still grappling with competitiveness challenges linked to major U.S. tax and regulatory changes as well as ongoing uncertainties around pipeline approval. It anticipates these factors will encourage some exporters to delay their investments or to make them outside Canada.
Following the new North American trade agreement, the bank now expects lingering trade tensions to lower business investment by just 0.7 per cent by the end of 2020, compared with the 1.4 per cent reduction it had predicted in July. Exports are now expected to take a negative hit of just 0.3 per cent compared to the previous prediction of a 0.7 per cent reduction.
The bank also released its latest monetary policy report, which predicted Canada’s real gross domestic product to expand 2.1 per cent in 2019, down from its July call of 2.2 per cent, and by 1.9 per cent in 2020. Its growth projection for this year has been increased slightly to 2.1 per cent, up from its previous prediction of 2 per cent.