Interest rate hikes hurting car sales, Canadian economy

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The plunging car sales add to evidence that higher borrowing costs start to eat in Canadian economic growth, perhaps faster than expected the central bank.

The sale of light vehicles fell 8.2 percent in November from a year earlier, according to the Automotive News Data Center in Detroit.

It was the biggest decline since 2009, according to a report Monday by DesRosiers Automotive Consultants Inc. Outside the financial crisis, the decline was the biggest since 2004. Meanwhile, Bank of Canada data show that the growth of residential mortgages in September slowed to 1.38 percent on a quarterly basis on an annual basis, the weakest rate since 1982.

The central bank has increased the financing costs five times since July 2017. Policy officers are generally expected to leave the benchmark interest rate at 1.75 percent on Wednesday, but more steps are being predicted next year. The median forecast in a Bloomberg survey among economists shows the percentage at 2.5 percent by the end of 2019.

Royce Mendes warns that the economy already feels the pain and that the central bank underestimates the impact of previous rises. The Canadian Imperial Bank of Commerce economist said that declines in car sales and residential investment – which shrink for a third-consecutively quarter, below an annualized 5.9 percent – appear earlier than expected, with the bulk of the effects still to come.

"We are starting to show signs that the economy can not handle interest rates much higher than the current levels," Mendes said by telephone from Toronto. "Things happen at least a bit faster compared to previous cycles" because of how households work with a lever, he said.

RATE SENSITIVITY

The relative importance of residential investments and vehicle purchases – two of the most sensitive sectors – has grown over the years. The sectors now account for more than 11 percent of the economy, compared to 9.7 percent when the last major tightening cycle started in 2004, and an average of about nine percent since 1961, according to CIBC calculations.

Even with the fall in car sales in November, 2018 is on schedule to become the second-highest record ever. That makes sense, since interest rates are still close to historic lows, and population growth is fueling an upward trajectory in the sales level – a trend that has existed since the 1940s.

Meanwhile, the Canadian housing market has slowed since the last rate hikes started, a period that coincides with changes in the rules for mortgage loans by the bank regulator of the country. Although it is difficult to determine how much of the delay is due only to higher rates, based on previous estimates of the extent to which only the rule changes, the delay in lending would have been tougher, Mendes said.

Government Stephen Poloz said in late October that rates should rise to a neutral stance, or anywhere between 2.5 percent and 3.5 percent. He told the lawmakers that the central bank wants Canadians to understand that 3 percent is just a & # 39; normal thing & # 39; and that it should not feel difficult & # 39 ;.

But the latest data can give Poloz a break. "It means for the Bank of Canada that they will not be able to make up their stated desire to reach the neutral rate of 3 percent," Mendes said, adding that he expects a "softer tone" on Wednesday from the governor.

"The most important point is that we have not seen the full effects of even past rate hikes," Mendes said. "We hardly get the biggest impact from the first interest rate hike that was taken in July 2017. All these follow-up trips still have time to make their way through the economy and come to a slower growth."