The Bank of Canada has raised interest rates nine times since the start of 2022, from 0.25% to the current rate of 4.75%. The central bank has taken an aggressive rate hike policy in an effort to tame stubbornly high inflation. Yet, despite higher interest rates, which is designed to slow consumer consumption, Canadians continue to spend.
Why Is Strong Consumer Spending a Bad Thing Right Now?
According to Statistics Canada retail sales increased 1.1% in April to $65.9 billion. This is a big reversal from March when Canadian retail sales fell 1.4%. The April gains easily surpasses the previous estimate of a 0.2% gain.
April’s retail sales growth was pretty broad based too, with sales up in eight of the nine sub-categories. Spending at general merchandise retailers (supercenters, warehouse clubs, department stores) was up 3.3% and grocery stores at 1.5%. The only category to experience a drop was furniture and home furnishings, electronics, and appliances retailers, which was down 1.6% month over month.
Core retail sales, which exclude auto and gasoline sales, climbed 1.5%, which is significantly higher than the headline number of 1.1%.
Overall, the retail data is strong, but there’s more to the numbers than meets the eyes. While retail sales were up 1.1%, retail sales volumes were up only 0.3%. This suggests the strong numbers are more about pricing than overall, robust sales. And we can see this play out with increased spending at general merchandise retailers and a decline in sales.
While consumer spending is expected to slow in the back half of 2023, further gains are still expected. An advance estimate by Statistics Canada suggests retail sales grew a further 0.5% in May. Though, as an advance estimate, that number is subject to change.
Will the Bank of Canada Raise Interest Rates Again in July?
Regardless, an increase in retail spending is not what the Bank of Canada was hoping to see as it makes efforts to slow domestic demand. Canadian consumer spending accounts for 55.9% of Canadian gross domestic product (GDP). It’s going to be difficult to tame inflation against a backdrop of resilient retail sales.
The Bank of Canada unexpectedly raised its interest rates in early June to 4.75%, the highest level since 2001, ending a brief two month pause. This comes after the Canadian economy rose 0.7% in the first quarter, the quickest pace since the second quarter of 2022.
In response to April’s strong retail sales data, several Bay Street analysts have said they expect the Bank of Canada to raise its key lending rate by an additional 25 basis points, to 5.0%, when it meets next on July 12.
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