Signs are growing that Canada’s economy is slowing under the weight of higher interest rates, but is it enough for the Bank of Canada?

The central bank makes its latest rate decision Wednesday, and a batch of data out last week supports a hold at 5 per cent, say economists.

Inflation numbers for September were a welcome relief, coming in below expectations. These were followed by retail sales on Friday that showed consumers were pulling back on spending. The Bank of Canada’s own outlook surveys also showed weakening sentiment among consumers and businesses.

“From the Bank of Canada’s perspective, there is evidence in these surveys to suggest that economic conditions are cooling, which should help them achieve their inflation target,” said TD economist Marc Ercolao.

The contraction in second-quarter gross domestic product was much weaker than the Bank’s forecast and third quarter looks little better, said Stephen Brown of Capital Economics.

The Bank may also be concerned about recent developments in the housing market. Capital is forecasting a 5 per cent decline in home prices over the next six months, as new listings surge and buyers, wary of higher borrowing costs, stay on the sidelines.

“That risks even weaker GDP growth than we forecast and, as house prices feed directly into the CPI, is another reason to expect core inflation pressures to ease in the coming months,” said Brown.

Another indicator that interest rates are working as intended is higher savings rates, said CIBC chief economist Avery Shenfeld. Though not as high as during pandemic lockdowns, savings rates are well above pre-pandemic levels as Canadians receive a greater reward for saving than spending amid higher rates.

Canadians facing mortgage renewals may be putting more money aside for the higher costs ahead or are unable to qualify for further borrowing.

“Whatever the cause, a more cautious household sector and the resulting hit to spending patterns, justifies a pause on rate hikes in Canada and perhaps in some overseas economies, even if the Fed continues to deliver another hike this year,” said Shenfeld.

While economists at National Bank of Canada expect rates to remain on hold this Wednesday, they caution this is not an open-and-shut decision.

“Although less than 50 per cent, the probability of a rate increase in our opinion is not negligible, said National Bank economists Taylor Schleich and Warren Lovely.

They point out that the softer September consumer price index came after “red-hot August and July reports,” still leaving the inflation profile higher than the Bank of Canada would like.

“This doesn’t leave the Bank in any position to water down its threat to raise rates further, even with an evident demand deterioration,” they said.

Inflation expectations in the Bank survey have moderated slightly but are still running at 3 to 4 per cent over coming years.

“It’s also worth bearing in mind Governing Council’s established track record for upending expectations,” said Schleich and Lovely.

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retail sales on Friday signalled that Canadian consumers are pulling back on their spending, as higher interest rates hit home, with sales down 0.1 per cent in August and flat in the early estimate for September. However, when Canada’s surging population is taken into account, the picture is even bleaker. National Bank of Canada economist Kyle Dahms, who brings us today’s chart, says on a per capita basis, the sales are down 5.7 per cent annualized, the worst pullback since the first pandemic lockdown.

“Considering the surging population, this result shows a significant weakening for households which have been hit by the negative effects of rising prices and the interest rate shock on household purchasing power,” he wrote in a note.

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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