July 15, 2022
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ECONOMIC IMPACT & RESOURCES
Bank of Canada hikes by 1% in bid to quell inflation
The Bank of Canada hiked interest rates by a full percentage point, a surprise move that supercharges efforts to withdraw stimulus amid fears four-decade-high inflation is becoming entrenched.
Governor Tiff Macklem raised the central bank’s policy rate to 2.5 per cent in a decision announced Wednesday in Ottawa that warned of more hikes to come. The 100-basis-point move is the largest increase since 1998. Markets and economists were anticipating 75 basis points.
The unexpected monetary jolt illustrates the extent to which officials are spooked by soaring inflation, electing to take decisive action even at the risk of causing severe economic pain. They cited worries that persistent inflation creates a vicious cycle of wage gains and price increases that makes it difficult to bring inflation under control.
“With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates,” officials said in the policy statement.
Investors ramped up bets that front-loading also means a higher terminal rate for the central bank. Overnight swaps are suggesting Macklem will hike the benchmark to 3.75 per cent by the end of this year, up from 3.5 per cent before today’s decision.
To explain the aggressive move, policy makers cited an economy “clearly in excess demand,” high and broadening consumer price gains and growing inflation expectations. Officials said they expect to continue raising rates further and will be “resolute” on bringing inflation back to target.
Still, policy makers indicated they believe front-loading rates would actually limit economic damage in the long run, by reducing the need to chase escalating inflation expectations in the future.
In the statement, the bank said “the economic cost of restoring price stability will be higher” if inflation becomes entrenched in wage and price setting expectations.
The 100-basis-point increase follows consecutive half-percentage-point hikes in April and June, making the current tightening effort one of the most aggressive ever. Wednesday’s super-sized increase brings rates into the neutral range, where borrowing costs are neither stimulative nor constrictive.
Central banks around the world have pivoted to more aggressive hiking paths as inflation pressures continue to surprise. The Federal Reserve delivered a 75-basis-point hike last month, which probably paved the way for the Bank of Canada to be aggressive in its decision this week.
Canada’s inflation rate expected to run around 8%
In the accompanying monetary policy report, officials again raised their near-term forecasts for inflation, seeing price pressures running at around 8 per cent in the middle quarters of this year. Inflation will drop to 7.5 per cent by the end of this year and won’t return to the 2 per cent target until the end of 2024.
Policy makers also slashed their outlook for the Canadian economy. They now see gross domestic product expanding 3.5 per cent this year and 1.8 per cent in 2023, down from 4.2 per cent and 3.2 per cent respectively, as global growth moderates and tighter monetary policy impacts activity.
The bank added analysis of a new risk scenario, in which a “self-reinforcing wage hike and price spiral” could ensue, saying that situation becomes more likely the longer inflation remains “well above” their 2 per cent target.
In an appendix to the report, the bank acknowledged mistakes in forecasting inflation over the last year. It primarily blamed the errors on global factors, but also cited domestic housing costs.
The bank said real-estate activity has already weakened substantially from what it described as an “unsustainable pace” during the pandemic. It expects both housing transactions and prices to decline into 2023 as rates rise.
Click here for the Bank of Canada Media Release and Monetary Policy Report
The next scheduled date for announcing the overnight rate target is September 7, 2022. The Bank of Canada will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on October 26, 2022.
Canada’s unemployment rate falls to record low
Canada’s jobs market showed signs of extreme tightening last month, with the unemployment rate falling to a record low, wage gains accelerating and large numbers of Canadians dropping out of the labor force.
The economy shed 43,200 jobs in June, Statistics Canada reported Friday in Ottawa, a surprise negative reading compared to the 22,500 gain anticipated by economists. But the drop appears to reflect the voluntary exit of workers from the labor force, which dropped by nearly 100,000 in June — the biggest one-month decline on record outside of the pandemic.
The drop in the number of workers pushed down the jobless rate to 4.9%, a low in data going back to 1976.
Reflecting the dearth of workers, the average hourly wage rate shot up 5.2% from a year ago, an acceleration from 3.9% in May.
The numbers illustrate the extent to which the nation’s labor market has run up against maximum employment, and will struggle to grow further without continuing to fuel wage gains. The imbalance between demand and supply of jobs is a primary reason why the Bank of Canada is tightening monetary policy so aggressively.
More highlights:
- Wage growth for permanent workers — a key gauge for the Bank of Canada — rose to 5.6% in June, from 4.5% in May
- The decline was all self-employed workers, with their numbers falling by 59,200. Losses were concentrated in the retail and wholesale sectors
- Part-time employment levels fell by 39,100, while the number of full-time jobs were down by 4,000
- The decline in both employment and labor force were led by youth, and older workers
- Participation rate fell to 64.9% in June, from 65.3% previous. Hours worked rose 1.3% last month, the first gain since March
Click here to read the full June Labour Force Survey
In Case You Missed It…
Changes to the Canada Small Business Finance Program are now in force
After several years of advocacy, the CFA has been able to get several changes to the Canada Small Business Finance Program to better help franchisors and franchisees. These changes to the Canada Small Business Financing Regulations came into force on July 4, 2022.
Franchisee fees can now be financed under the CSBFP
Under the changes that came into force the CSBFP will allow intangible assets (franchise fees, incorporation costs, permits and licenses, etc.) and working capital costs can be financed as a term loan.
Previously these were ineligible for financing under the program and had to be paid for out of pocket of through other credit products that were offered by financial institutions.
The changes to the CSBFP give lenders and small businesses additional financing products, new class of loans, increased loan amounts and terms, improved loan conditions and decreased administrative burden.
Implementation
Now that the changes are legally in force, the banks can start to incorporate them into the financing products that they offer. Each bank will implement the changes based on its own internal roll out process that is outside of the control of both the federal government and CFA.
Click here for more information on the changes.
OTHER NEWS
27% of Canadians cutting back on necessities amid inflation: MNP
Some Canadians are scaling back spending on basic life necessities such as food, utilities and housing as the cost of living continues to surge, the latest MNP Consumer Debt Index survey has revealed.
Twenty-seven per cent of respondents said they’ve cut back on essentials, while 37 per cent said they’ve chosen to buy cheaper versions of their everyday purchases, the data showed. Nearly half (46 per cent) have cut back on non-essential items, including travelling, dining out and entertainment.
Six in ten reported they were already feeling the impact of higher interest rates – a seven-point jump in the index compared to last quarter. The survey was conducted by Ipsos on behalf of MNP LTD.
Half of the respondents said that if rates continue to climb, they will be in financial trouble. Almost a quarter of respondents said they are not financially prepared to deal with an interest rate increase of one percentage point.
Resources for Franchisors and Franchisees in New Brunswick
New Brunswick Small Business Tax Credit
The New Brunswick Small Business Investor Tax Credit provides a 50% (for investments made after April1, 2015) non-refundable personal income tax credit of up to $125,000 per year (for investments of up to $250,000 per individual investor) to eligible individual investors who invest in eligible small businesses, community economic development corporations and associations in the province. For a corporation and trust eligible investor, the New Brunswick Small Business Investor Tax Credit provide a 15% non- refundable corporate income tax credit of up to $75,000 per year (for investments of up to $500,000).
If an investor cannot use the entire Small Business Investor Tax Credit amount in a given year, the tax credit can be carried forward seven years or back three years.
Click here for more information on the tax credit.
Working New Brunswick
Working New Brunswick is a government agency aimed at connecting employers with potential employees. WorkingNB’s HR support services include:
- Access to Human Resources (HR) expertise
- Access to labour market information
- Recruitment support at local, provincial and national levels
- Support for training activities
- Recruitment and retention strategies
- Performance management strategies
- HR policy development
- Customized training options
- Other employment supports
Click here for more info on Working NB.
Ottawa calls on telecom companies to shore up networks after Rogers outage
Canada’s industry minister is calling on Rogers and other telecommunication companies to come up with a plan to bolster the resiliency of Canada’s cellular and internet networks after last weeks massive outage left millions offline and affected some critical services.
On Monday, François-Philippe Champagne convened a meeting of telecom CEOs (Telus, Bell, Rogers, etc.) to talk about ways to prevent similar service disruptions in future.
At the meeting Champagne said that, he wants to see the companies come up with a plan within 60 days for mitigating the impact of future outages on consumers. The plan should ensure telecom companies offer mutual assistance during outages and no customers are left without access to 911 service.
The Canadian Radio-television and Telecommunications Commission (CRTC) will launch an investigation into the outage.
Who is eligible for a 4th COVID-19 vaccine dose? A province-by-province breakdown
Many provinces are offer people a 4th dose of the COVID-19 vaccine. The link below will take you to a story from CBC News to help you determine if you are eligible where you live.
Who is eligible for a 4th COVID-19 vaccine dose? A province-by-province breakdown.
Health Canada approves Moderna’s COVID-19 vaccine as first for youngest kids
Health Canada approved Moderna’s COVID-19 vaccine for infants and preschoolers Thursday, making it the first vaccine approved for that age group in the country.
Health Canada now says the Moderna vaccine can be given to young children between the ages of six months and five years old in doses one-quarter the size of that approved for adults.
Mandatory random COVID-19 testing for fully vaccinated air travellers resuming next week
The federal government says it will resume mandatory random COVID-19 testing of international travellers arriving at four major airports next week.
Ottawa suspended random testing for fully vaccinated travellers last month after airport authorities urged the government to drop the program, saying it was causing long delays at airports. Testing remained in place for those not considered fully vaccinated.
Fully vaccinated travellers will once again be subject to mandatory testing, although the government is moving the testing out of airports to nearby off-site locations, such as pharmacies. Travellers also can book a virtual self-swab appointment.
Fully vaccinated travellers arriving in Toronto, Calgary, Vancouver and Montreal could undergo random testing starting Tuesday July 19.
NEWS FROM OTHER COUNTRIES
U.S. inflation rises to 9.1% in June
The U.S. annual inflation rate defied expectations and rose to a new multi-decade high of 9.1 per cent in the year up to June.
The U.S. Bureau of Labour Statistics said Wednesday that the cost of living rose by 1.3 per cent in the month of June alone, and in three of the past four months.
Rising costs for gasoline, shelter and food were the main drivers of the annual uptick. Energy prices have increased by 41.6 per cent in the past year. Food costs are up by 10.4 per cent. Shelter costs are up by 5.6 per cent.
Economists had been expecting the rate to decline slightly from the 40-year high of 8.6 per cent reached the month before, but instead it ticked even higher, reaching its highest point since 1981.
Analysts say these red-hot numbers will likely compel the U.S. central bank to raise its lending rates even more aggressively in the coming months, upping its rate by 0.75 of a percentage point in August and again in September.
