The Bank of Canada decides to hold the Overnight Rate at 5 per cent

Key Insights

Consumer and business confidence have reached their lowest levels since the pandemic. Since the first interest rate hike in March 2022, a discernible erosion in both consumer and business confidence has occurred. Notably, our Index of Consumer Confidence index has presented a downward trend, plummeting from an initial score of 95.3 at the onset of the rate hikes to 61.2 as of last month. Likewise, our Index of Business Confidence has mirrored this regression, declining from a score of 80.7 in the first quarter of 2022 to 71.5 by the second quarter of 2023. As the previous hikes’ effects continue to mature, it is likely Canada’s consumer and business confidence will remain low for the short-term period.

Inflation expectations have trended towards the Bank’s target range. As the influence of interest rates has proliferated through the economic landscape, the outlook on inflation among Canadians has gradually realigned with the Bank’s prescribed target range of 1 to 3 per cent. According to a series of Conference Board of Canada surveys administered by Leger, the percentage of individuals anticipating inflation to fall within this range in the coming twelve months has surged from 22.9 per cent in November 2022 to 39.6 per cent in August 2023. Likewise, expectations over a three-year horizon have climbed from 34.7 per cent to 40.9 per cent. This upswing presents a favorable indicator for the Bank and its inflation objectives. This movement may suggest that expectations have not become anchored above the desired range, and perhaps more importantly that drastic policy interventions may not be necessary to attain their stated inflation goal.

The majority already believe we are in a recession. Leger’s recent North American Tracker survey, published on September 1st, underscores that a significant majority of Canadians (61 per cent) perceive the country to be currently experiencing an economic recession. Furthermore, 47 per cent of respondents indicated financial struggle, and 38 per cent expressed concerns about potential job loss. In August, reflecting many of these apprehensions, our Index of Consumer Confidence registered its lowest level since the beginning of the pandemic. Nationally, respondents have trended towards pessimism, reporting diminished outlooks on their present and future financial situations, as well as on prospective employment opportunities. Paradoxically, this prevailing pessimism among consumers may have a mitigating effect on inflation. As concerns related to personal finances and employment intensify, there is an anticipated shift towards greater savings and reduced spending, thereby constraining demand and exerting a downward influence on inflationary pressures.

To better understand how the rate hikes, as well as other economic events have impacted business confidence, please visit our Index of Business Confidence.