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Business Outlook Sours in Canada, Complicating Interest-Rate Path

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The data suggest the Bank of Canada might not need to raise interest rates much further in order to bring demand and supply back into balance

The central bank’s business outlook indicator fell to 0.07 in the fourth quarter, from a revised 1.74 previously. About 70% of businesses see the economy heading into a recession, and more firms than usual expect their sales to decline. Higher interest rates and inflation have also limited the ability of consumers to spend, the bank said in a separate survey.

“The survey data very much suggests that the bank may be quite close to the end of its tightening cycle,” Toronto-Dominion Bank strategists Andrew Kelvin and Robert Both said in a report to investors. Nevertheless, “the bank can ill afford a premature pause in 2023.” Governor Tiff Macklem and his officials have slowed down the pace of rate hikes and signaled that future decisions will depend on economic data. The central bank has already raised borrowing costs by 4 percentage points since last March, bringing the benchmark overnight rate to 4.25%.

The contrast between the deteriorating business outlook and a recent string of stronger-than-expected economic data complicates the bank’s policy response.

 

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