The recent rate hike by the Bank of Canada (BoC) came as a big surprise to many in Canada, economists included. Now, an analyst at Canadian Imperial Bank of Commerce (TSX:CM) isn’t just calling the decision unnecessary but even a mistake.
What happened?
Last month, the BoC increased the interest rate by another 25 base points, with the interest rate now at 4.75%. The move came as the BoC stated it wanted to put pressure on Canadians to stop spending, with demand in the economy remaining strong.
Now, Canadians are set with the potential of yet another rate hike coming down on July 12. Investors, consumers, economists, and really just Canadians, in general, are now all on edge about the potential of yet another increase.
But according to economist Andrew Grantham, he believes this recent rate hike was a mistake. In a note from CIBC Capital Markets, Grantham stated he doesn’t believe the BoC is taking into consideration that consumers, indeed, already have been taming their spending.
Economist weighs in
Grantham stated in the note that the BoC made the decision, as Canadians continue to see high amounts of spending. There are many reasons for this, such as pent-up demand from the pandemic as well as excess savings.
However, Grantham stated that the BoC isn’t taking into account the whole picture. While demand remains strong, the BoC may not be considering growth rates and the level of spending that’s going on with Canadians.
“The volume of spending in these interest rate sensitive areas are still 1% below Q4 ’19 levels. That would obviously be even worse in per-capita terms, given the strong population growth seen recently, and represents a roughly 10-15% shortfall relative to its pre-pandemic trend. Spending in normally interest rate sensitive sectors includes areas that were hardest hit by either pandemic-related restrictions (travel, restaurants) or supply-chain issues (autos). Classifying recent growth in such spending as pent-up demand would be a bit misleading, as households aren’t on average eating out more or going on an extra vacation to make up for the pandemic years.”
Andrew Grantham, CIBC economist
Supply-chain issues remain, and there have been increases since the pandemic, but Grantham stresses this is because we’re returning to normalcy after a very abnormal period.
What investors can do now
Investors should plan for the worst and hope for the best. Hopefully, the BoC will soon agree with Grantham and realize that Canadians have indeed tightened their spending in comparison with normal periods and with ongoing population growth. But if it doesn’t, prepare by investing in strong companies that provide solid, high dividends.
In fact, Grantham’s bank CIBC remains a strong option here. The bank is down during this period of volatility and high interest rates but will likely see a quick increase once Canada returns to normalcy. Therefore, you can pick it up for a discount, trading down about 13% in the last year at 10.76 times earnings.
You can therefore grab a 6.23% dividend yield at this moment, which can help fund your income while you wait for normalcy to return to the economy. While it could be a while yet, hopefully, this “mistake” will soon be rectified.
