Canadian Households To Cut Spending and Pay Down Debts If Rates Rise: BoC

Higher interest rates might force Canadian households to do the unexpected — pay down debt. That was one of the findings in the Bank of Canada (BoC) Survey of Consumer Expectations. The Q2 2022 results show many households plan to change spending behavior if rates rise. It also revealed the average person expects inflation to be at double the BoC forecast next year. 

Households Inflation Expectations For Next Year Surged To A High

Canadian households are expecting inflation won’t be coming down much over the next year. Respondents expect annual growth of inflation will hit 6.8% by Q2 2022 over the next year. They also see annual growth at 5.0% two years from now, more than double the BoC’s target rate. Both responses received the highest annual expectations in the history of the survey. 

Source: Bank of Canada.

Most Canadians Have Doubts About The BoC Controlling Inflation

Many households shared doubts the central bank is able to control inflation. In Q2 2022, 11.7% of households felt the central bank can’t control inflation ever. Another 46% believe the BoC can control inflation sometimes. That’s 57.8% of households doubting the BoC’s ability to control inflation most of the time. It’s relatively flat from the 55% in Q4 2019, but that’s a lot of people doubting Canada’s monetary system can be effectively managed. 

Fewer than half of households had confidence in the monetary system. Households felt the BoC was able to control inflation most of the time (34.9%). Even less felt the central bank was in control all of the time (7.3%). That’s 42.2% of households that believe the BoC is in control most of the time.

Source: Bank of Canada.

The majority don’t see the BoC able to control inflation most of the time, and a minority think it’s possible. What would your conclusion be? Wrong. Well, at least according to the BoC.

They took that data and came to this very carefully worded conclusion: “Most respondents indicated the Bank has the credibility and tools to bring inflation back to target.” 

It’s an interesting way of viewing that data. Technically, it’s true. It’s hard to believe those who see the BoC sometimes controlling inflation are referencing right now. Perhaps in a more stable environment. No one collected the data on that, so it’s hard to draw a complete conclusion here. 

Canadian Will Save More and Pay Down Debt If Rates Rise

Higher inflation means higher interest rates, and changed spending behavior. If interest rates rise by 1 point over the next year, 1 in 5 (22.8%) of households said they’ll cut back and save more. Other households said they would postpone major purchases (13.8%) or pay down debt (12.6%). A small share said it would accelerate their purchases sooner (7.4%).

Source: Bank of Canada.

The last point is a bit odd, since higher rates slow inflation by reducing demand. In the age of panic hoarding, people paradoxically think prices won’t drop with demand. Instead, they believe prices will continue to rise even as fewer people purchase goods.

You Might Also Like