Explainer-Why is the Canadian economy strong despite the record pace of rate hikes?

By Steve Scherer

OTTAWA (Reuters) – Despite the fastest cycle of monetary tightening in the country’s history, Canada’s economy is still booming, forcing the central bank to raise its key interest rate to a record high again. 22-year-old by 4.75% last week.

Analysts are betting on another rate hike in July to help the Bank of Canada bring inflation back into its 2% range. Here are some factors that are keeping demand strong in the Canadian economy.


Many of Canada’s major banks have allowed holders of variable-rate mortgages to extend their amortization periods to keep their payments roughly the same, temporarily easing the impact of higher borrowing costs.

As a result, higher borrowing costs have so far caused less financial stress on homebuyers than they anticipated, so the market hasn’t seen a spike in the supply of forced sellers.

This has partially contributed to the recovery in house prices, which have jumped 17% in the three months since January, after a year-long slump.

“It’s really something that’s been a game-changer in terms of the transmission of monetary policy to the economy,” said Randall Bartlett, senior director of Canadian economics at Desjardins.

“A lot of households have been able to continue spending in ways they otherwise couldn’t and stay home in ways they otherwise couldn’t.”


Canadian consumers splurged in interest-rate-sensitive sectors, including durable goods like furniture and appliances, despite a 1% decline in disposable income in the first quarter, dipping into their savings in case of pandemic. The savings rate halved to 2.9% in the first quarter from the fourth quarter of last year, Statistics Canada said.

“It seems a lot of Canadians are looking to catch up on experiences they haven’t been able to have in a few years,” like traveling and eating out, Bartlett added.


To offset the impact of inflation, which peaked at 8.1% last year, federal and provincial governments enacted affordability measures, such as a one-time grocery discount of 2.5 billion Canadian dollars ($1.9 billion) for low-income people that was included in this year’s budget. .

The provinces have adopted a number of different measures, including the reduction of fuel taxes. Provincial stimulus is expected to total about C$12 billion in fiscal year 2023-24, Bartlett said, up from more than C$20 billion in mid-2022.

Taken together, “they all exacerbate inflation when you’re in an excess demand environment,” Bartlett said. But he estimated it would add “much less” than a tenth of a percentage point to inflation this year.

The central bank says that budget spending does not increase inflation, but neither does it help bring it down.

($1 = 1.3347 Canadian dollars)

(Reporting by Steve Scherer; Additional reporting by Nivedita Balu in Toronto; Editing by Paul Simao)

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