Speaking a day after we decided to hold interest rates unchanged, Deputy Governor Lynn Patterson discussed the key points Governing Council considered in their decision. Focusing on consumer spending, she explained that households have slowed purchases more sharply in recent months than expected.
Policy rate unchanged
We decided to leave our key policy interest rate unchanged at 1.75 per cent.
Spending has slowed
Consumer spending has been the main driver of the economy in recent years, but we didn’t expect the pace of buying and borrowing to continue. Growth in consumption—spending on goods and services—slowed compared with 2017. So did housing. That means households contributed less to the economy. We’ve seen these shifts:
- Housing sales and prices have cooled.
- Spending on non-essentials like new cars and vacations has slowed.
- Growth in mortgage and consumer borrowing has declined.
Household spending was lower than we expected in the fourth quarter, with categories more sensitive to interest rates continuing to soften.…To better determine the factors at play, we will need more data.Lynn Patterson, Deputy Governor
Most households are managing debt
Higher interest rates increase the amount of interest you pay on your debt. This means less money to spend on other things.
However, interest rates are not the only factor reducing household spending:
- Lower prices for oil and other commodities have affected national income.
- People feel like they are less wealthy because the housing market has cooled.
- Disposable income grew more slowly last year.
- Global trade disputes have caused uncertainty.
Data suggest the majority of households are managing their debt levels….That’s not to say that for some individuals, struggling to keep up with their payments isn’t demanding painful adjustments.Lynn Patterson, Deputy Governor
We need time to better understand what’s happening
A lot of economic data have been disappointing, including exports, investment and consumption. The first half of this year will probably be weaker than we forecast. But the job market is still strong and wages are rising.
It’s a mixed picture, and we need more time and more data to better understand what’s going on. We will have more to say at our next interest rate announcement in April. We will publish a new forecast then, too.
Although we figured the economy was in for a detour at the end of last year, that detour may wind up being longer than we had expected.…With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets and global trade policy.Lynn Patterson, Deputy Governor