Canada has $300-billion cash buffer to soften blow of coming recession, says RBC’s CEO

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“Unprecedented liquidity” in the market will buoy Canada’s economy as it moves through a modest recession, said the head of the country’s largest bank.

Royal Bank of Canada chief executive Dave McKay, in an interview with BNN Bloomberg, said Canada is headed for a slowdown as higher interest rates designed to curb inflation slow consumer spending.

The Bank of Canada raised its rate a quarter percentage point to 4.5 per cent on Jan. 25. Since March of 2022 the central bank has hiked eight times, adding 4.25 percentage points, to bring its benchmark rate to a 15-year high.

The impact of higher borrowing costs has already shown up in the housing market, where activity is down almost 40 per cent and prices have fallen roughly 15 per cent, McKay said.

As the economy slows further, RBC expects the unemployment rate will climb from around five per cent to six or seven per cent.

However, McKay said unprecedented amounts of liquidity still held by consumers and corporations should prove a big buffer to any downturn.

“We do expect a modest recession, supported by still strong latent demand by the consumer but also this enormous liquidity that we have in the marketplace,” he told BNN.

McKay said the liquidity has swelled to about $300 billion from about $40 billion that consumers and businesses had on hand before the pandemic.

“300-plus billion dollars of cash, sitting on balance sheets to absorb the shocks from higher rates, to absorb the shocks from any job loss that we do expect to see and therefore supportive of quick recovery.”

McKay estimates the “unprecedented” amount of liquidity is almost 20 per cent of gross domestic product.

“So, when you think about that latent spending power, it’s very significant stimulus for recovery,” he said.

McKay said the battle against inflation has taken rates higher than anyone expected, and if central banks had started tightening earlier it might not have been so hard on consumers.

“But we’re getting the job done, and we’ll have to hold rates there for a while to make sure we got the job done on inflation and then hopefully, latter part of ’24 you’ll be able to start easing again,” he said.

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