For a variety of reasons, it’s going to be a while before new-vehicle sales feel the effect of the Bank of Canada’s latest interest rate hike, says Charles Bernard, lead economist at the Canadian Automobile Dealers Association. (CADA)
The Bank of Canada on Wednesday raised its key interest rate to 4.5 per cent, the highest it’s been since 2007.
“The sales aspect is hard to evaluate just because as much as the interest rate could affect consumer behaviour, there’s more inventory in the last few months than there’s been in the last few years,” Bernard told Automotive News Canada. “The pent-up demand for cars has been building over the last few years. So, it’s hard to evaluate right now whether that demand translates [to sales].
“In the last few months, we’ve seen an increase in sales, and that was when interest rates were going up.”
The central bank raised its key interest rate by a quarter of a percentage point this week, marking the eighth consecutive hike since March in the face of decades-high inflation.
Meanwhile, fourth-quarter sales in 2022 rose 1.3 per cent to 351,816 over the final three months of the year, which is traditional a slow sales period.
“The reality is there is more inventory, but still not at the levels we expected,” Bernard said. “We expect 2023 to be a year where supply and demand meet. But, because of the interest rate…we’re not sure when those elements will meet; in six months or at the end of the year.”
Shahin Alizadeh, the CEO of the Downtown Auto Group in Toronto, recently told Automotive News Canada that inventories are “normalizing and improving for some brands.” He said Detroit Three inventory, for example, “is much less of an issue.”
Bernard said rate hikes, consumer cash on hand left over from the pandemic, high transaction prices, the threat of a recession and varying inventories across brands have consumers “confused” about when and where to spend their money.
The average transaction price for a new vehicle in Canada in December reached a record $49,900, according to J.D. Power. The average transaction price in Canada for 2022 was just below $48,000, and up 12 per cent versus 2021, the firm said.
Bernard said if consumers are waiting for the “bubble to burst” when it comes to high prices, there’s “no guarantee that will happen” because of the cash on hand and pent-up demand still within the car-buying market.
“Consumers don’t really know what to think,” he said. “The market is hard to read because consumers don’t really know where the economy is going.”
The Bank of Canada said Wednesday that it expects the latest increase to be its last of the cycle as it pauses to assess the effects of higher rates on the economy.
Bernard said it has the potential to affect dealers on two fronts: sales and operations.
Higher interest rates — and increased inventory — mean higher carrying costs and an increase in costs of loans to perform store upgrades.
“That’s another dynamic dealers have to worry about,” Bernard said. “More dealers talk about the effect of rates on how they run their business rather than how they affect sales.
“It might take six to 12 months to see interest rates have an effect on sales.”
‘CONDITIONAL PAUSE’ ON HIKES
If economic developments stay in line with its current projections, the central bank said it expects to hold its key interest rate of 4.5 per cent at its current level.
“To be clear, this is a conditional pause,” Governor Tiff Macklem said at a news conference Wednesday. “If we need to do more to get inflation to the two per cent target, we will.”
The rate hike Wednesday comes after months of inflation slowing in Canada. After peaking at 8.1 per cent in the summer, the country’s annual inflation rate has steadily declined and reached 6.3 per cent in December.
The Bank of Canada also published its latest monetary policy report Wednesday, providing updated projections for the economy and inflation.
According to the report, the central bank expects inflation to slow faster than it had previously anticipated. It is forecasting the annual inflation rate will fall to three per cent by mid-2023 and to its two per cent target in 2024.
The slowdown in inflation has been attributed to declines in energy prices as well as easing in global supply chain disruptions.
Labour groups have voiced concerns about the Bank of Canada’s rate hikes in recent months, with Unifor President Lana Payne previously accusing the central bank of waging war on the working class.
“Workers’ jobs and incomes are at stake here. It’s time to stop the rate hikes before the economy is pushed into a deep recession,” she said.
TD expects the Bank of Canada to begin slashing rates at the end of 2023.
With files from the Canadian Press.