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Bank of Canada | Another “heavy” rate hike in sight

The Canadian economy held firm in March, ending the quarter with annualized growth of 3.1%, which argues in favor of a third key rate hike on Wednesday.

Posted May 31

Helene Baril

Helene Baril
The Press

“GDP growth of 3.1% is respectable, especially since the first month of the year was hampered by health measures”, commented the economists of the National Bank after the publication of the most recent data from Statistics. Canada on the evolution of the economy.

In March, the Canadian economy grew by 0.7%, ending the first three months of the year at an annual rate of 3.1%. This is much lower than expected, which exceeded 5%, but the picture is still positive. Domestic demand, including consumer spending and residential investment, has driven the economy since the start of the year. Non-residential investment, particularly in Quebec, contributed to the growth.

Even though most federal assistance programs have ended, the household savings rate continues to rise and remains above its pre-crisis level, giving them a cushion to face inflation and the rise in interest rates.

Preliminary estimates from Statistics Canada point to more modest growth of 0.2% for the month of April.

At 3.1%, the economy’s current growth rate is in line with the Bank of Canada’s forecast in its most recent Monetary Policy Report (3%).

Since the publication of Monetary Policy Report on April 13, virtually all economic indicators reinforced the need for higher interest rates.

Jocelyn Paquet, Laurentian Bank Economist

Like many of his colleagues, the economist expects the Bank of Canada to raise its rates for the third time, by 50 basis points, this Wednesday.

“Nothing in today’s report [sur le PIB] does not allow the central bank to slow down its strength in the short term”, also believe the economists of the National Bank.

Towards a deceleration of inflation

The key rate could therefore go from 1% to 1.5% in an attempt to slow inflation that is still galloping, to 6.8% in April.

At the Laurentian Bank, forecasters are of the opinion that inflation could have peaked in April, to begin its deceleration.

In the United States, prices continue to climb, but the pace of the increase slowed in April. Prices rose 6.6% in March, compared with a 6.3% jump in April.

While most observers expect a fourth rate hike from the Bank of Canada to be necessary in July, the outcome is less clear. A pause is possible, because the real estate market, in particular, seems to react quickly to the increase in the cost of money. “A change of tone [de la banque centrale] is likely thereafter, as the decline in activity in sectors sensitive to interest rates will cool the economy,” said Randall Bartlett, senior director, Canadian economy, at Desjardins.

Growth in several sectors

According to Statistics Canada, household spending rose 0.8% in the first quarter, recording a third consecutive quarterly increase.

Spending on durable goods rose 2.6% in the first quarter, led by a 16.1% increase in spending on new motor vehicles and a 3.5% rise for new trucks, vans and sport utility vehicles .

However, Statistics Canada noted that despite the increases, spending on motor vehicles remained below pre-pandemic levels as supply chain issues continued to plague this sector.

Residential construction rose 4.3%, with renovation spending up 9.3%, resale costs up 4.6% and new home construction up 0.2%.

Business investment in non-residential buildings rose 2.9% and that in machinery and equipment rose 0.9% in the quarter, while spending on engineering structures rose 3.5% .

Statistics Canada also reported employee compensation rose 3.8% on a nominal basis for the quarter. Excluding the third quarter of 2020, the federal agency noted that this was the largest quarterly increase since the second quarter of 1981.

With The Canadian Press

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