The Bank released its business outlook and consumer expectation surveys which show a deterioration in business and consumer sentiment as interest rates rise
will remain elevated for several years – a challenging mix for the Bank of Canada that sets the stage for another large interest rate hike next week.published a pair of quarterly surveys on Monday showing a deterioration in business and consumer sentiment as interest rates rise, hitting the housing market and squeezing consumer spending power.
The crucial metric for the Bank of Canada in both surveys is inflation expectations. What consumers and businesses believe about future price increases can have an impact on the trajectory of inflation, as employees negotiate higher wages and companies raise prices to protect their margins. The central bank is worried that people will expect permanently high inflation and price increases will become self-reinforcing.
“For the first time in the past five quarters, businesses reported that their supply chains had improved compared with three months ago,” the Bank of Canada said. “Several firms – more than in recent quarters –noted an easing in labour market tightness. They described seeing a decline in competition for labour, including less poaching, compared with 12 months ago.”
The picture was less positive in the consumer survey. Short- and medium-term inflation expectations continued to march higher, with the median respondent saying that inflation would be 7.1 per cent one year out, and 5.2 per cent two years out. In five years, they expected inflation to be 3.4 per cent, down slightly from the last survey.
“Canadians who aren’t familiar with the BoC’s inflation targeting think the target is upwards of 5 per cent, while even those who are familiar believe the target is close to 3 per cent,” Benjamin Reitzes, Bank of Montreal’s head of Canadian rates strategy said in note to clients. “If you’re looking for a reason for the BoC to remain very hawkish with its rhetoric, look no further.”
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