As Canadians cut back, mortgage holders say they can make higher payments: BoC survey

OTTAWA — Canadians are increasingly cutting back on spending while mortgage holders remain confident they can keep up with higher payments when their loans renew, a Bank of Canada survey says.

The central bank released its fourth-quarter consumer expectations and business outlook surveys Monday, revealing how Canadians are faring amid higher borrowing costs and rising prices.

Roughly two-thirds of consumers said they were reducing spending or planning to do so because of their expectations for interest rates and inflation.

“While many Canadians are experiencing rising levels of financial stress, this stress is higher among those who typically live paycheque to paycheque,” the Bank of Canada said.

The central bank said financially vulnerable households typically hold less than two weeks worth of expenses in liquid assets, frequently run out of money before the end of the month and are not able to immediately pay for an unexpected expense of $500.

The survey found one in four consumers reported having at least one of these characteristics.

And while Canadians are more pessimistic than the previous quarter about the economy, mortgage holders still expect to make their payments when their mortgages are renewed at higher rates.

About 80 per cent of mortgage holders said they are somewhat or very confident they’ll be able to make higher payments.

A TD report last month that looked at internal mortgage and credit card data found people who had reset their mortgages in 2023 have pulled back their spending more than whose who renewed in 2021 and 2022. 

The finding suggests that higher interest rates are causing mortgage holders to lower spending as they face higher monthly payments.

The Bank of Canada has held its key interest rate steady at five per cent since its last rate hike in July. The pause was prompted by growing evidence that higher rates are slowing down both the economy and inflation. Canada’s inflation rate was 3.1 per cent in November and is expected to continue declining in the coming months.

Although the central bank has not officially ruled out more rate hikes, economists widely expect its next move will be to cut interest rates sometime this year as the economy continues to weaken and inflation steadily falls. 

The central bank’s business outlook survey finds weaker demand and renewed competitive pressures have slowed down the pace of price increases.

And while labour shortage concerns have faded, businesses expect wage growth to remain above average until 2025, propping up their expectations for inflation.

Meanwhile, the top concerns among businesses are demand and economic uncertainty as most of them report being negatively impacted by higher interest rates.

“These firms have relatively muted sales outlooks, modest investment intentions and weak hiring plans,” the central bank said.

Andrew Grantham, CIBC’s executive director of economics, said the business outlook survey offers some comfort to the central bank that things are trending in the right direction, though not by enough to justify early rate cuts. 

“Overall, the report should make the Bank of Canada feel a little better that inflationary pressures and expectations are normalizing, albeit not by quite enough yet to bring an early interest rate cut. We continue to expect a first move in June,” Grantham wrote in a client note. 

The Bank of Canada is set to make its next interest rate announcement on Jan. 24. It will also be publishing its quarterly monetary policy report, which offers new economic forecasts.

This report by The Canadian Press was first published Jan. 15, 2024.

Nojoud Al Mallees, The Canadian Press