A new report forecasts that excess demand will dissipate during the second quarter of next year, at which time the BoC will be in the position to start gradually reducing its policy rate.

The Bank of Canada continued its policy of quantitative tightening last month, bringing the benchmark rate to a 22-year high of 5%. In part, the bank attributed the move to “surprisingly strong” consumption growth, which came in at 5.8% in the first quarter of the year.

In investigating the drivers of consumption — both actual and desired — a new report from Scotiabank Economics cautions that it will still be some time before the BoC can begin to consider rate cuts. More specifically, it says, it’s unlikely that the bank will be in the position to cut until well into 2024.

“The Canadian economy has been incredibly resilient in the face of rapidly rising interest rates,” writes René Lalonde, Director, Modelling and Forecasting for Scotiabank. “Much of this surprising strength can be ascribed to pent-up demand — a measure of the gap between actual and desired consumption — amongst a broad range of things, including increased wealth and population growth. While all three factors are linked, this note focuses on pent-up demand as a source of economic resilience.”

Lalonde — who was previously the research director for the BoC, and has also spent some time working on modelling at the International Monetary Fund — points to the pandemic for some context, saying that it was during that time that the gap between actual and desired consumption widened, leading to a greater degree of demand.