Was the latest Bank of Canada hike necessary?

The Bank of Canada’s most recent hike was essentially superfluous, according to Andrew Grantham of CIBC Capital Markets.

The senior economist noted that it might seem like a natural conclusion to say that the previous policy rate hikes haven’t yet affected consumer spending, especially considering that inflation-adjusted spending on rate-sensitive components has grown by nearly 15% since the rate-hike campaign began on March 2022.

However, in real terms, said spending – which covers industries that have been worst-hit by pandemic-era restrictions (like travel and food services) or supply chain issues (like automobiles).

 – has actually declined significantly compared to previous years.

“Looking at the level relative to 2019 tells a very different story, with the volume of spending in these interest rate sensitive areas still 1% below Q4 2019 levels,” Grantham said. “That would obviously be even worse in per-capita terms, given the strong population growth seen recently, and represents a roughly 10-15% shortfall relative to its pre-pandemic trend.”

“While supply issues are certainly still hampering spending to some extent, with airlines, restaurants, and other service providers still trying to recruit staff, and car dealers still working through unfilled orders, these issues are improving and may no longer entirely account for the shortfall in spending in such areas relative to their pre-pandemic trend,” the economist added.

What these trends mean is that the actual level of demand can only be evaluated through the economic results of the coming months—and that any BoC rate hikes at this point might be excessive.

“If rate hikes have already been working to cool demand more than is apparent by simply looking at growth rates, history could show that the recent Bank of Canada rate hike (and any subsequent moves) was at best unnecessary, and at worst a mistake,” Grantham warned.