Rate hike not expected to slow record auto sales

Michael Lewis

A looming increase in the Bank of Canada’s benchmark interest rate is not expected to have a significant short term impact on vehicle borrowing costs or put the brakes on record auto sales in Canada for 2017.

“If there’s a 25-basis-point bump it’s hard to see a direct link to higher rates in the short and medium term,” said Michael Hatch, chief economist at the Canadian Automobile Dealers Association.

Hatch noted that even if the Bank increased rates next week, consumer and business interest rates would remain at historic lows.
Sales figures released this week indicate that the Canadian auto industry remains on track for all-time record sales of more than two million units this year, after topping the one million sales mark for the first time over the first half.

That’s in marked contrast to the U.S., where softness in fleet sales has reduced the annualized sales pace to only 16.4 million units, well below the average of 17 million during the previous five months.

While DesRosiers Automotive warned that “surpassing 2016 as an all-time record setting year may not be a foregone conclusion,” if Canada follows the U.S. trend, observers such as Carlos Gomes, Scotiabank auto industry specialist, said strong business investment and job creation keep the industry here on pace for sales of 2.1 million units in 2017.

Gomes said increased business investment has added to rental and lease vehicle activity in Canada, while double-digit fleet sales declines have been recorded by several Asian automakers south of the border.

Overall vehicle purchases in Canada climbed a record 6.5 per cent on an annualized basis in June, with truck sales posting a double-digit year-over-year increase and accounting for nearly 69 per cent of the Canadian new vehicle sales.

Those surging truck sales more than offset weakness in the passenger vehicle category.

George Iny, president of the Automobile Protection Association, said he expects car makers to maintain low rates on new vehicles because it makes long-term car loans of seven to eight years more palatable to the buying public.

“It’s a bad loop if they get into it, if they raise rates, because it will then make the long loan unattractive,” he said. “And then people won’t take the vehicle at all.”

Higher rates may actually lead to a short-term blip as dealers and buyers look to take advantage of rates now, added Bill Johnston, vice-president of data and analytics at the Equifax Canada credit bureau.

“(But) over coming months, the cumulative rate hikes will begin to slowdown auto sales as manufacturers will find it more difficult to offer the long-term promo rates.”

Hatch, however, said he believes Canada’s better-than-expected job creation performance this year suggests that higher borrowing costs would not derail record sales, although they could push up lease and loan costs over the longer term if the rate creeps up “a lot more.”

The current overnight rate, the interest rate the central bank charges a financial institution to borrow money overnight, has been set at 0.5 per cent since 2015, but is forecast to rise at the Bank of Canada’s rate policy meeting on July 12.

Bank Governor Stephen Poloz told CNBC last month that low rates since the 2008 fiscal crisis have “done their job.”

And Poloz in an interview with Germany’s Handelsblatt added that he is confident Canadian households can weather a hike despite high ratios of debt to disposable income, given that delinquency rates remain low amid rising net household wealth that mirrors residential real estate values.