BoC may need to raise interest rates again, according to economists
Canada's strong economic results are at odds with the expectation last year that interest rates would push the economy into a recession.
Momentum in the Canadian economy is spurring speculation that a rate hike is on the way, but economists don’t expect the Bank of Canada to pull the trigger this week.
The central bank will be making its next interest rate decision on Jun. 7, just one week after new data showed the Canadian economy is still growing — despite interest rates sitting at the highest levels since 2007.
Statistics Canada recently reported real gross domestic product grew at an annualized rate of 3.1 per cent during the first quarter. The figure beat out what forecasters had pencilled in for the first three months of the year.
Meanwhile, the federal agency’s preliminary estimate for April suggests the economy expanded once again.
Even the housing market, which was the first to be hit by rising interest rates, appears to have levelled off as prices rise again.
Economists say the momentum is putting the Bank of Canada in a tough spot: the central bank has argued that a slowdown is necessary to bring inflation back to the two per cent target, but that slowdown hasn’t yet come to fruition.
Now, all eyes will be on how the central bank addresses the recent data and underlying strength in the economy.
“The question for us is: how much does the Bank of Canada acknowledge this hot data that’s been coming out, which goes against the notion that the economy is slowing,” said James Orlando, TD’s director of economics.
Orlando said the data suggests a resurgence in growth, rather than a slowdown, especially given consumer spending rebounded during the first quarter.
Canada’s strong economic results are at odds with the expectation last year that interest rates would push the economy into a recession. Instead, economists are now speculating the Bank of Canada will raise interest rates in July.
“Hiking next week probably doesn’t make much sense,” Orlando said, given the central bank typically communicates its moves head of time.
Desjardins chief economist Jimmy Jean agrees that a rate hike is more likely to come in the summer, which would give the central bank some time to assess inflation pressures.
Earlier this year, the Bank of Canada announced a pause on its rate-hiking cycle that began in March 2022. After raising rates rapidly from near zero to 4.5 per cent, governor Tiff Macklem said the pause would provide the central bank some time to assess the effects of rate hikes on the economy, given a lag exists between the two.
But members of the governing council were already discussing raising interest rates at their last decision meeting in April. According to the summary of deliberations, “the resilience of economic growth” was one of the rationales for a rate hike.
Forecasts of an imminent recession have turned out to be pessimistic. And yet, inflation has still eased significantly, says Orlando.
Orlando said if inflation falls to three per cent this summer without job losses, that would be cause for celebration.
“Inflation has come down to much more comfortable levels. And if we can maintain this economy right now, and get inflation back down to three per cent, that’s so much more of a positive outcome than anyone would have thought we would have been in,” Orlando said.
