Higher interest rates are supposed to rein in consumer spending, but households aren’t cutting back the way central bankers wanted
It’s not just a Canadian story. Many central banks are contending with shoppers who refuse to wilt in the face of higher interest rates, challenging long-held assumptions about the transmission of monetary policy into the real economy. That includes the U.S. Federal Reserve, which raised its benchmark interest rate again this week to a 22-year high.and the broader economy will depend to a large degree on whether consumers keep their wallets open through the back half of 2023.
“It’s no longer just about, ‘Oh, I can just cut out my coffee spending.’ Everyone’s already done that stuff. So we’re finding so many more people have already cut what they can and they’re really at that bare bones,” Ms. Western-Macfadyen said. Indeed, population growth could help explain why the robust overall spending numbers don’t necessarily jive with what many Canadians are feeling, said Stephen Tapp, chief economist at the Canadian Chamber of Commerce.
In its most recent Monetary Policy Report, published earlier this month, the Bank of Canada estimated that around three-quarters of households have considerably more “liquid savings”– cash or easily sellable assets – than before the pandemic. That’s hardly conducive to a sudden collapse in consumer demand.But there are significant pockets of stress. The proportion of credit cards hitting their spending limit, for example, is at an all-time high for people without mortgages.
It’s hard to get a straight answer to this from the data, said Amanda Sinclair, a senior analyst with Statscan. But you can draw reasonable conclusions, she said. “The areas where you think you’d see the canary in the coal mine, it should be the areas where there’s a lot of households that are overstretched and particularly those who took on variable mortgages,” he said.
Unlike in the United States, where elevated bank deposits have been declining over the past year, Canadians are still sitting on large amounts of these excess savings. This is concentrated among high-income households and much of it has been shuffled from demand deposits into interest-bearing term deposits and GICs. The question, hotly debated by economists, is whether this money will power more consumer spending in the future.
“Governing Council agreed that, on balance, consumption should moderate as higher interest rates continue to work through the economy,” the summary of deliberations said.
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