Canada’s economy grew at an annualized rate of 3.% in the first quarter, according to Statistics Canada, raising the odds of a Bank of Canada interest rate hike. Household spending on goods and services rose in the first quarter while housing investment fell for the fourth straight quarter.

A consensus of economists had expected the economy — as measured by Gross Domestic Product — to grow at an annualized rate of 2.5% in the first quarter. Even the Bank’s latest forecast had the economy growing at an annual rate of 2.3% in the first quarter.

The continued economic strength could tempt the Bank to increase rates as it attempts to drive inflation down. “It’s definitely stronger than expected. It turns up the temperature for the bank,” said BMO chief economist Douglas Porter.

Before the GDP announcement, trading on the overnight interest “swap” market had priced in a 30% likelihood of a quarter percentage point interest rate hike in June, and a 50% likelihood of an increase at the bank’s July meeting. After the announcement, the odds rose to 40% and 60%, respectively, Porter noted.

Stronger than expected GDP, combined with several straight months of higher than expected job growth — and a rise in inflation in April — make another interest rate hike more likely, Porter said. “It’s the uniformity of how the data is coming in on the stronger side of the ledger,” he said.

CIBC economist Andrew Grantham agreed that the GDP number makes it more likely the Bank of Canada will raise rates eventually, but expects a move would come in July rather than June. “The resilience of GDP raises the possibility of a further interest rate hike from the Bank of Canada. However, we still expect that they will want to wait and see more data … rather than pull the trigger … as early as next week,” Grantham wrote in a research note.

In April, Canada’s annual rate of inflation rose for the first time since last June, hitting 4.4%. While that was substantially lower than last June’s peak of 8.1%, it’s still higher than the bank’s 2% target.

In March 2022, the bank began an aggressive rate-hike campaign in a bid to drive inflation down, pushing its key overnight rate to 4.5% from 0.25%. The theory is that by making it more expensive to borrow money, consumers — and businesses — will spend less, which will drive prices down.

In January, a hike of 25 basis points (a quarter of a percentage point) came with a statement from bank governor Tiff Macklem that it was pausing hikes — at least temporarily. In April however, the bank said in a forecast that it expects inflation to fall to around 3% “by the middle of the year,” and to hit 2% by the end of 2024.

Source: The Star
Source: Financial Post
Source: Statistics Canada