The Bank of Canada is unlikely to raise interest rates this week, even as the war in Iran continues to put pressure on energy prices and inflation, explains a financial analyst.
Gas prices are already acting like a rate hike for Canadians, Jennifer Tozser, senior wealth advisor and portfolio manager at National Bank Financial Wealth Management told BNN Bloomberg.
Weaker-than-expected job growth and uncertainty surrounding CUSMA and the housing market are key factors affecting Canada’s economic health, which Tozser points out will ultimately drive the Bank of Canada’s decisions.
“It’s a pretty fragile balance right now, and raising rates is not necessarily going to be good for the entire economy.” she says.
While the latest employment report exceeded expectations, Tozser says the headline figure masked weakness beneath the surface.
“We had an expectation that the new jobs created would come in at about 10,000, but they actually came in at quite a big, larger number of 18,000,” says Tozser.
However, Tozser says much of the employment growth came from part-time work, while Canada lost higher-paying government and manufacturing positions.
“We’ve actually replaced higher-paying jobs with lower-paying jobs,” she says.
Resource prices squeezing household spending
The continued rise in the cost of gas and energy continues to put financial pressure on many Canadians, highlights Tozser.
“A typical Canadian feels that pinch in their day-to-day spending. So that itself acts a little bit like an interest rate hike because it gives us less disposable money to spend,” says Tozser.
“And it took a bit of pressure off for us when the U.S. didn’t raise rates because if the U.S. raises rates and we don’t, that can have a negative effect on our currency.”
However, she argues, this predicament is structurally unlikely, as energy prices differ significantly across spot prices and short- and long-term contracts.
“I don’t see energy prices remaining structurally longer for a long period of time. But we would be listening to see if he has a different opinion,” she says.
Housing market vulnerability
The condition of Canada’s housing market will also be central to the Bank of Canada’s decision, says Tozser.
Many homeowners have recently renewed mortgages at significantly higher rates, while Canadian banks have reported increases in loans that are at least 90 days delinquent, she says. Home sales have also weakened.
“Our housing market is so important to an average Canadian. An average Canadian has a mortgage,” Tozser says.
CUSMA adds another layer of uncertainty
Trade uncertainty is also complicating the outlook for Canada, she says, particularly as businesses await greater clarity over the future of Canada-United States-Mexico Agreement (CUSMA).
The auto sector has been among the industries most exposed to tariffs and uncertainty over the North American trading relationship.
Tozser says the tentative three-year agreement reached between Ford Motor Co. and Unifor, covering approximately 5,000 workers, is therefore an important signal for Canada’s manufacturing sector.
“It shows a willingness to negotiate. It shows a willingness for Canada to continue to be an important manufacturer for the auto industry,” she says.
Tozser says manufacturing accounts for approximately 10 per cent of Canada’s gross domestic product, making it critical for the country to maintain its presence in the sector.
“To maintain all those workers for three years is significant,” she says.
Canada losing its investment advantage
Despite the Canadian dollar’s weakness, which would normally make domestic manufacturing more cost-competitive, Tozser says Canada is struggling to attract and retain investment.
“We are actually at a pretty strategic disadvantage right now, when we should be at a major advantage because of how low our currency is,” she says.
“We’re seeing a lot of our manufacturers actually moving their investment or their entire facility away from Canada and down to the U.S.” points Tozser.
Canada also faces higher tax rates, housing-affordability challenges and a much smaller domestic market than the U.S., she says.
“If you’re manufacturing your item and most of your sales are to the U.S. and those are at risk, that’s a serious consideration if you want to stay here,” Tozser says.
Reducing regulatory barriers could help improve Canada’s competitiveness and productivity, she adds.
“It’s not just an operational inefficiency; it’s actually become a real drag on our productivity.”
