More interest rate hikes likely before year's end, says agriculture economist

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On September 7th, the Bank of Canada announced a rate increase of 75 basis points bringing the overnight rate to 3.25 per cent. The move wasn’t a surprise to many, yet begs the question, are we done yet?

The increase is designed to curb consumer spending and ultimately blunt inflation, however, consumer spending isn’t always tied to borrowing money, explains JP Gervais, chief economist with Farm Credit Canada.  He says consumer savings account balances play a large role in where the spending starts and stops, and may have a greater impact on inflation as it sits now.

The Canadian consumer savings rate was at 6.2 percent by the end of the second quarter, down from 8.1 per cent at the end of the the first quarter, according to Statistics Canada. Gervais says this percentage is likely to decline quite a bit by the end of 2022 and as the savings accounts dry up, that is when we could actually start to see consumer spending lessen, reducing inflation.

“It’ll take consumers maybe the rest of the year to go through the savings. I’m hoping that this is going to be done instead of raising debt. And then I think we would see a significant decline in consumer spending, which is really what you need to slow down inflation, and I think we’re getting towards that maybe a little bit slower than we thought or than I thought,” says Gervais.

Does that theory mean that we won’t see another rate increase before the end of the year? Not necessarily. Gervais shares that yesterday’s announcement included sentiments that provided insight as to what we can expect, or not be shocked by, in the coming months.

From the announcement, Gervais says it’s apparent that we aren’t done, meaning another rate increase is extremely likely. What that increase will be is the real question now. He says the door is essentially open and to see another 50 point increase by the end of October wouldn’t be surprising, however, we could also see another one after that in December as well.

“The one thing that really stood out to me, reading the Bank of Canada statement… towards the very end, there’s an explicit acknowledgment that the interest rate increases are going to be needed. To me [that] sends a strong signal that we’re not done,” says Gervais.

Anyone who has indulged in a holiday meal can attest to the fact that it’s usually wise to eat a little and let it settle oppose to feasting, overdoing it and feeling the negative effects shortly there after. Rate increases can play that same game.

Historically, it takes about six to eight months to see the full effects of a rate increase, which means there is the possibility of overdoing it before letting the first one, or two, settle and assess from there. Gervais says he doesn’t believe that we are within that bubble quite yet, however; anything over another 50 point increase could be pushing the boundaries of overdoing it to the point where it would have unnecessary negative effects on the economy down the road.

For those weighing their options and wondering if we will see these rates start to decrease in 2023, Gervais says the likelihood of that scenario has decreased, but is still possible.

“There was some chance to see high rates go down in the second half of 2023, if there is an economic slowdown and so forth. But now, I think yes, it’s still possible, but is it likely? Not so much right now. The yield curve is showing a little bit of a negative slope but, it’s not that negative. So the signals are not that strong to have rates lower in 2023.”

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