In case RBC CEO is right about our spending plans, interest rates may start growing sooner

Next time you’ll be asked about your plans on spending pandemic savings, think twice, as the future of interest rates in Canada may depend on your answer.

David McKay, chief executive of RBC, Canada’s largest lender and second-biggest company by market capitalization after Shopify Inc., believes there will be a huge shopping spree soon.

Meanwhile, Tiff Macklem, the Bank of Canada governor, admits it’s a possibility, but says a shocked nation will more likely use most of its excess cash for savings, paying off debts and investing. That’s one of the reasons the BoC kept its promise to leave the key lending rate at 0.25% until at least the second half of the next year, even amid inflation exceeding the Bank’s target zone in summer.

However, the main question is whether such an unpredictable crisis has changed our attitude to spending. A total amount of households’ savings reached $208 billion in the second quarter, while it was only $17.9 billion in the second quarter of 2019, Statistics Canada report says.

Bankers in Canada and the United States don’t believe that North Americans lost their love for conspicuous consumption. According to McKay, much of the household savings represent money that is “just waiting to be spent”.

Such comments reduce the BoC’s ability to control the narrative, which is important for managing expectations about prices trends. The Bank of Canada will need a convincing story for its next updates of economic outlook on October 27. Otherwise, it will have to admit that McKay is right and change course drastically.

Now, Macklem still says the inflation is transitory. He reiterated that price pressures will ease as soon as suppliers and logistics companies solve the issue of numerous disruptions ranging from port congestion to drought. “The business community is extremely creative”, – he noted. “They have already solved difficult issues in the past.”

The central bank doesn’t seem to worry much about the possibility that its policies will cause such a demand that the economy can’t cope with. According to its quarterly polls of consumer sentiment, households are less eager to spend a lot on goods they don’t need.

The BoC’s first post-pandemic outlook says very little of Canadians’ excess savings will reach the economy through consumption. In July, policy-makers changed that outlook, stating that 20% of savings will be spent on purchasing goods and services, while the rest would be used for paying off debts, investing and buying properties. Macklem says one more revision is possible as soon as they review the numbers for the next outlook.

“Households have been telling us they will keep saving a lot of it, although they will still spend part of it,” – he said. “We will keep revising those outlooks in line with what we hear.”

An upward review on spending could make the central bank start raising rates sooner than planned. Today, the Bank doesn’t plan to raise its overnight rate before the second half of 2022.

Nevertheless, in case there is proof that we’re as materialistic as we were before the pandemic, it may be reasonable to take into account higher rates when making your spending plans.


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