The Bank of Canada’s decision on Wednesday to hold its key interest rate at five per cent is expected to bring some relief and stability to Canadian workers, but experts say turbulent labour relations will likely continue amid high living costs.

Canada has seen a number of high-profile strikes this year as workers push for higher wages amid high inflation, including an ongoing strike by workers on the St. Lawrence Seaway marine shipping route.

Now, previous Bank of Canada rate hikes appear to be having some effect as inflation slows – but higher borrowing costs have had a “devastating” effect on workers, according to University of Manitoba labour studies professor Julia Smith.

“People are struggling to pay for rent, mortgages, groceries and other basic necessities,” Smith told BNNBloomberg.ca in an email. “At the same time, companies have been laying off workers in response to the economic slowdown.”

Smith said the Bank of Canada’s decision to hold its trend-setting interest rate will provide welcome relief for workers. But she agued that the pause does little to alleviate the strain workers are already under from high borrowing costs and wages that have not kept up with the cost of living.


“If interest rates remain high, so too will the cost of living,” she said.

DT Cochrane, senior economist with the Canadian Labour Congress, agreed with Smith that the Bank of Canada’s rate hold will offer some stability for Canadian workers going forward. Despite that, he predicted that unions will continue demanding higher wages for their members with the cost of living and inflation still high.

“(Workers) spend their salaries to buy goods and the cost of those goods going up has meant their purchasing power has decreased significantly,” he told BNNBloomberg.ca in a Wednesday interview.

“We have seen some good gains in compensation for workers, but they still haven’t closed that gap.”

‘FAR TOO HAWKISH’

In Cochrane’s view, the Bank of Canada has been “far too hawkish” during its period of quantitative tightening, and he said that has left workers bearing the brunt of elevated inflation and interest rates at the same time.

The Bank of Canada has given no indication of when it will cut interest rates, and on Wednesday again indicated that it would raise rates in the future if necessary.

Cochrane made the case that the central bank should lower rates at its next decision on Dec. 6, though many economists believe the bank is likely to adopt a “higher for longer” approach, not cutting rates until 2024. 

RBC economist Rachel Battaglia contended that a lengthy period of high rates could make it more challenging for workers to successfully bargain for higher wages.

Elevated rates will bring about more economic cooling, Battaglia explained, and that will help bring down inflation over time – but it will also make it more difficult for workers to make wage gains, she said.

“Slower economic activity means less demand for workers and, consequently, less bargaining power for workers to demand the same outsized wage adjustments recorded over the last one to two years,” Battaglia told BNNBloomberg.ca in an email.

EFFECT OF WAGES ON INFLATION

Some economists argue that the recent wage gains won by unions have themselves led to upward inflationary pressure, but Battaglia said compensation-growth has come from wages simply catching up to inflation.

She noted that when hourly wages and CPI are indexed to the start of the pandemic, wage growth has just narrowly outpaced CPI, meaning real wages have only slightly increased.

Battaglia said that wage growth could start contributing to higher inflation if real wages continue to grow without a corresponding increase to productivity.

“Given Canadian productivity is on a downward trend, higher wage growth could be inflationary – warranting structurally higher interest rates in the years ahead,” she said in an email.

Cochrane, meanwhile, said that consumers have been unfairly burdened with taking on higher costs passed along to them through the supply chain.

He cited a recent Competition Bureau report that identified a growing number of highly concentrated industries with companies that have increased markups and profits overtime as competition has decreased.

Cochrane argued that workers’ wages should keep rising rise until companies are willing to take on more costs at the expense of profits.

“Why is it that workers are expected to bear all of this pain when we've seen the corporations be able to protect if not increase their own profit margin,” he said.


Consumers overestimating how low, and

how  fast, interest rates will fall: economists


Rosa Saba, The Canadian Press

With interest rates likely at or near their peak in Canada, experts say consumers shouldn’t expect rates to return to pre-pandemic levels.

The central bank is more likely to bring its overnight rate to between two and three per cent, though not anytime soon, said David Macdonald, senior economist with the Canadian Centre for Policy Alternatives.

“That’s a ways off. That’s not next year,” he said, adding that consumers may not have fully grasped this yet.

The Bank of Canada on Wednesday held its overnight rate at five per cent, after a breakneck tightening cycle from near-zero in March 2022. The overnight rate affects interest rates offered by financial institutions.

The Bank of Canada’s overnight rate was 1.75 per cent throughout 2019, before the central bank dropped it to a quarter of a point to support the economy during the onset of the COVID-19 pandemic.

The central bank is widely expected to hold rates high in the near term as it seeks to quell inflation. But even once rates begin to fall, economists said ultralow rates aren't in the cards.

The Canadian economy, and consumers along with it, is going through an accelerated paradigm shift, said TD chief economist Beata Caranci -- less a gradual shift than a cold glass of water to the face.

Caranci thinks Canadians are aware that interest rates aren’t going back to pre-pandemic levels, but she also thinks they’re too optimistic about when, and how fast, rates will go down.

Borrowers have been increasingly opting for shorter terms on their mortgages, hoping rates will be lower in a year or two, she said.

That may well happen, but it’s not a guarantee, she said.

“If you look at our forecast, if you look at the consensus on the street ... Most people have some cuts coming in by the second half of next year. But that's presumed that the economy is weaker than it is today,” said Caranci.

“One of the points I've been stressing with our clients is, the speed at which rates went up will not be the speed at which they go down.”

In a report Wednesday, CIBC Capital Markets chief economist Avery Shenfeld said the central bank will likely be able to ease its overnight rate to 3.5 per cent by the end of next year.

A term that’s often used to describe where the overnight rate may go -- or where it should go -- is the neutral rate. That’s essentially the “Goldilocks” of the central bank’s rate, explained Caranci: “It's an interest rate that allows the economy to grow neither too hot or too cold.”

In an Oct. 5 report, Caranci and senior economist James Orlando wrote that they believe the neutral rate in the U.S. is on the rise due to factors like climate change investment, changing supply chains and higher government deficits.

“A higher neutral rate means that the current policy rate may not be as restrictive as the (U.S. Federal Reserve) thinks,” they wrote.

A similar trend is at play in Canada, according to Caranci and Orlando, but Canadian consumers' high debt levels mean a lower neutral rate north of the border.

Prior to the pandemic, rates in Canada and globally had been historically low for years, said Macdonald -- because inflation had been low for decades.

Rates were as low as half a percentage point during the past decade, including for a two-year stretch between July 2015 and July 2017. Over the past 10 years, the average overnight rate was 1.27 per cent.

There are downsides to having very low rates, said Macdonald, including the fact that when recession hits, the central bank has very little room to stimulate the economy by lowering rates further.

Over the years, low rates also contributed to a housing boom, he said. The Bank of Canada’s mandate is to keep inflation in check, Macdonald said, but home prices aren’t included in the Consumer Price Index.

The seasonally adjusted average price of a home in September was $669,689, according to the Canadian Real Estate Association, a 70 per cent increase from $392,647 a decade earlier and a 216 per cent increase from $211,893 in September 2003.

This “explosion” in home prices drove substantial wealth inequality over time, said Macdonald, as anyone lucky enough to have their foot in the door at the right time saw their wealth grow, while others were left behind.

He agrees that Canadians are now in a “difficult period of adjustment,” where household budgets are being eaten up by mortgage costs, rent is on the rise and house prices are expected to moderate. That adjustment has really just begun, he said.

“We’ve still got a long way to go at these much higher interest rates and much higher inflation.”

-- With files from Nojoud Al Mallees

This report by The Canadian Press was first published Oct. 27, 2023.