Canadians are holding onto less cash, according to the country’s central bank. Bank of Canada (BoC) numbers show M1+, a measurement of “cash,” is seeing growth plummet. The deceleration of growth is a sign that consumers are spending more to service debt. That’s the good news. The bad news is it’s also a sign of slowing economic growth, and usually accompanies an interest rate cut. But aren’t we hiking?
The M1+ in Canada is the BoC’s measure of the most liquid form of money. This includes currency outside of banks, plus chequable deposits held at chartered banks, trust and mortgage loan companies, and credit unions. In plain english, it’s anything you can spend with little notice. It’s an important number, and one of the most important indicators in the economy. Unfortunately, no one talks about it outside of the BoC.
The BoC manages the rate of money growth “indirectly,” this measure being important. When they increase rates, people borrow less and begin paying down their loans. The result is less cash is floating around, which is reflected by slowing growth of the M1+. Slowing growth is always a sign of declining economic growth. The impact is first seen in product that require large financing, like houses and cars.
Canada’s M1+ Falls To The Slowest Pace of Growth Since 2003
Growth of M1+ is decelerating at the fastest pace in over a decade. The BoC estimates annual growth at 4% in May, down from 11.6% last year. This is a huge drop from just a month ago, when the 12 month rate of change was 5.5%. We’re now at the lowest pace of growth since October 2003. The decline is almost certainly a result of higher interest rates.
Percent change in M1+, showing declining economic activity.
Source: Bank of Canada, Better Dwelling.
Higher interest rates need more cash to service existing debt. The full impact of a policy change isn’t seen until 6 to 12 months after action, according to the BoC. Since this data is less than 5 months from the most recent hike, it would be for this measure to not drop further. That’s before you consider they’re trying to move to neutral policy rate.
What Were Canadians Doing In 2003?
If you’re like me, you’re probably wondering what was happening in 2003? StatsCan noted in a 2004 report that home prices and consumer spending were growing fast. Income growth wasn’t where it needed to be, so “households had to find other means to finance their outlays. They did so by running down their savings rate and borrowing more.” Sounds familiar. The rate environment was also similar – the BoC expected to hike. Instead, they ended up cutting to prevent a recession.
Canadians are keeping less cash accessible, as rates rise and households begin deleveraging. Despite the market expecting a rate hike this week, it would be slightly odd. The most recent hike is still driving both the M1+ and consumer credit growth to multi-year lows. Hiking into this deceleration would likely drop it to levels Canada hasn’t seen in over twenty years.
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