Between interest rate increases of over 450 basis points (4.50%) since April 2022, and an expectation of persistently high inflation, both Canadian consumers and businesses say they are now feeling the impact.

According to the Bank of Canada’s latest quarterly Consumer Survey of Consumer Expectations, current economic conditions are bringing cost of living concerns to the forefront for Canadians—especially when it comes to mortgages.

“Interest rates are worsening the financial vulnerability of many households,” the report states, adding that, “Most homeowners’ mortgage payments are near or beyond the maximum level that they can manage without making significant spending cuts.”

In one interview conducted by the BoC, one homeowner found struggles with a higher rate renewal even though they prepared for the upcoming stress. “We renewed our mortgage at a higher rate. We were prepared because we saw it coming, but the monthly payments are higher so it’s eating into our discretionary spending,” they said.

Though consumers are feeling more financial pressure, the majority of borrowers believe they can meet these higher payments upon renewal without having to make “significant spending cuts.”

Businesses expect more impact from tightened monetary policy

In the BoC’s last Business Outlook Survey, businesses are seeing additional negative consequences from the overnight interest rate sitting at 5.00%.

Nearly three quarters (73%) of respondents reported greater negative impacts on their services offered—an increase of 20% from last quarter.

Results from the survey also find that “over half of firms surveyed believe that the effects of past monetary tightening…are far from over.”

A report from TD Economics said that “elevated price pressures remain a top concern for businesses and households.”

And with businesses still planning for “larger and more frequent price increases” according to the survey, TD expects those increases will be passed along to consumers.

Inflation expectations declining and recession still expected

According to both surveys, inflation expectations are slowly declining, though with a caveat: consumers’ expectations are remaining “stubbornly high,” the BoC survey notes. The actual CPI, year-over-year including all items, is sitting at 3.47% as of Q2. However, consumer sentiment expects the rate of inflation to be much higher—consumers view inflation to be around 6.6%. Additionally, they are only viewing a drop of around 1% in the next 12 months.

In contrast, businesses’ inflation expectations are cooling and some businesses are confident that the BoC will be able to meet its inflation target “within the next one to two years.” Businesses are expecting an annual inflation rate of 3.43% one year from now, and 2.5% five years from now.

Though lower than last quarter’s results, businesses’ expectations regarding inflation are still above pre-pandemic levels. Businesses attribute their short-term expectations to “labour costs, commodity prices and housing prices,” the survey notes.

The Consumer Expectations Survey notes that these high interest rates are “weighing on consumer sentiment generally” and can be seen in consumers’ increased pessimism about the economy. Over half (55%) of consumers now expect a recession—an increase of five percentage points from Q2.

The survey further indicates that, “Consumers typically associate high interest rates and inflation with a greater likelihood of an economic downturn over the next year.”

Business sentiment slips even further

Although businesses are leaning towards cooling inflation, their current sentiment on market conditions are dropping. The Business Outlook Survey (BOS) indicator fell further from Q2, dropping from -2.31 to -3.51. This is the lowest the indicator has been in a decade, “except for a brief period early in the COVID-19 pandemic,” the survey reports.

The drop reflects businesses’ continued downward sentiment regarding weaker past sales growth, weaker hiring conditions and investment opportunities, and expectations of slower growth in costs and selling prices.

Though fewer businesses compared to previous surveys “mentioned cost pressures, labour shortages or supply chains” as their most pressing concerns, cost pressures were still top of their list, according to the BoC survey. In addition, worries surrounding slowing demand and tightening credit conditions continued to climb.

“Contrast between slowing economic activity and more persistent price pressures in Canada was apparent again,” RBC economist Claire Fan noted in a research report.

This combination of “elevated inflation expectations on the part of consumers,” along with abnormal price-setting behaviour from businesses, will be a point of concern for the BoC, she wrote.

In spite of this, the BoC is “well aware” that inflation comes behind the economic cycle, and more evidence has been shown that these interest rate hikes—though they come with repercussions—are working to slow economic activities, she added.

Regardless, upcoming inflation data will be watched closely. As for interest rate hikes in the future, RBC’s “base-case assumption” is that no additional hikes are needed for the time being.

Bank of Canada BoC business outlook survey consumer expectations interest rates

Last modified: October 16, 2023