By Molly Cone
TORONTO, March 22 (Reuters) - When the Bank of Canada
became the first major global central bank this month to pause
raising interest rates after its most aggressive tightening
campaign in history, indebted consumers heaved a sigh of relief.
But with the benchmark rate still at a 15-year high of 4.5%
and borrowing costs expected to stay higher for longer,
Canadians are in no rush to open their purse strings. Many are
planning to save instead, a habit they acquired during the
pandemic.
Consumers' reluctance to spend could challenge an economy
facing headwinds from a record pace of interest rate hikes as
retail spending accounts for about 5% of Canada's Gross Domestic
Product. Analysts say slower consumer spending could be a trend
that plays out in other countries as well as central banks
worldwide prepare to end their aggressive rate hikes to tame
inflation.
Iqhlaas Ahmad, a food and beverage worker in Canada's
financial capital Toronto, said most of his money goes to basic
amenities like food, clothing and shelter.
As an immigrant, he has clear priorities. "Our mentality
over here (in Canada) is definitely saving up in order to
survive," he said.
An Angus Reid study released on Tuesday found that 47% of
Canadians say they are worse off financially than in 2022, with
38% reporting feeling the same and only 15% feeling better.
The Royal Bank of Canada's consumer spending tracker
released on March 9 showed discretionary spending "held up" in
February, driven by air travel demand. But restaurant spending
edged lower while rising grocery inflation sapped spending
power.
Canadians are sitting on about C$350 billion ($255 billion)
in excess savings generated during the pandemic, RBC economist
Carrie Freestone estimated. While it is unclear what part of
that has been deployed, that kitty will help Canada to avoid a
deep recession, she noted.
"Savings are definitely a good thing. It means people are in
a better position coming out of the pandemic than they were
before, at least in terms of savings."
Sun Lee, who owns a women's clothing boutique Aria in
Toronto, noticed fewer and thriftier customers entering the
store since the pandemic. Even her own budget, she said, first
goes toward food and shelter.
Douglas Porter, chief economist at BMO Capital Markets, said
he has seen people shifting money from checking or savings
deposits into longer term instruments like a guaranteed
investment certificate (GIC) since the central bank held off on
hiking rates at its March 8 meeting.
"They're trying to lock in these interest rates," Porter
said.
For many Canadians, owning a house is a top priority, but
high mortgage rates make it difficult to buy one even as
benchmark prices have fallen 11.2% from a May peak according to
Teranet–National Bank National Composite House Price data.
Jesse Kleine, a British Columbia-based realtor, said huge
interest payments are discouraging people from buying a home.
While BOC's rate-hike pause may not be enough to re-energize
the housing market, he expects the central bank's decision will
bring clarity on how high rates are going to rise, Porter said.
"(But) I don't think it'll necessarily change saving
behavior," he added.
($1 = 1.3726 Canadian dollars)
(Reporting by Molly Cone; Editing by Richard Chang)
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