A raft of new measures to stimulate the economy could make the Bank of Canada think twice about how quickly it cuts interest rates.
Catch up: The federal government’s stimulus plans, announced last week, include a sales tax holiday and stimulus cheques for most working Canadians.
- The GST/HST will be suspended from December 14 to February 15 on groceries, restaurant meals, kids’ clothing and toys, some alcohol, and a number of other products.
- All Canadians who worked in 2023 and earned less than $150,000 will also get a $250 cheque beginning in early spring.
Why it matters: Together, those measures are worth around $6 billion, or 0.2% of GDP. That could be a large enough stimulus to make the Bank of Canada more cautious about cutting rates lest inflation rear its head again.
- Economists from BMO Capital Markets, Desjardins Securities, Scotiabank Economics, and Capital Economics are now forecasting a 25-basis point rate cut in December. RBC Economics is still predicting it’ll slash rates by 50-basis points.
- Bond yields rose following Ottawa’s announcement, a signal that investors believe the move will encourage the central bank to keep rates higher for longer.
Zoom out: Tax holidays and stimulus cheques aren’t the only factors pushing the BoC to slow down on rate cuts — it’s also factoring in hotter-than-expected inflation last month and recent signals by the U.S. Federal Reserve that it would proceed more cautiously with its own rate cuts.—TS