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Will they, won’t they?

Whether the Bank of Canada raises interest rates next week or not, the more important question now is how high will rates eventually rise? Our view is that current market pricing is too aggressive.
Stephen Brown Senior Canada Economist
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Canada Economics Weekly

Economy losing momentum

While the apparent contraction in GDP in May appears to have been partly due to temporary factors, it also reflects the impact of the surge in interest rates on housing. With the business surveys for June also showing a loss of broader momentum, the economy may be slowing even sooner than we anticipated.

We are sending the Weekly early this week as our Toronto office is closed for the Canada Day holiday on Friday. Happy Canada Day!

30 June 2022

Canada Data Response

GDP by Industry (Apr.)

The preliminary estimate suggests that the healthy 0.3% m/m rise in GDP in April was followed by a shock 0.2% contraction in May but, as this appears to have been partly due to temporary factors, it probably won’t stop the Bank of Canada from enacting a larger 75 bp interest rate hike next month.

30 June 2022

Canada Chart Book

Tight labour market pushing up wages

The tight labour market is putting upward pressure on wages, with the Labour Force Survey showing a strong 1.0% m/m rise in average hourly earnings in May. While the annual rate of wage growth, at 3.9% y/y, remained lower than before the pandemic, base effects mean it is likely to accelerate to closer to 6% over the second half of 2022. All this adds to the pressure for the Bank of Canada to rapidly tighten policy, particularly as the current weak rate of productivity growth suggests that there is minimal scope for businesses to absorb higher wage costs. We expect the Bank to raise its policy rate by 75 bp in July and follow that with a further 50 bp hike in September and a 25 bp hike in October, to take the policy rate to 3.0%. By then, we think the weakness in the housing market and a sharp slowdown in employment growth will be enough to cause the Bank to pause its tightening cycle, and ultimately remain on the side lines as GDP growth slows below its long-run potential in 2023.

29 June 2022

More from Stephen Brown

Canada Data Response

Retail Sales (Nov.)

The rise in retail sales in November was not as strong as it looks, and the preliminary estimate suggests that sales fell sharply in December amid the Omicron wave. They are likely to fall further this month.

21 January 2022

Bank of Canada Watch

Bank of Canada to tee up March hike

Amid growing wage pressures, we now forecast that the Bank of Canada will raise interest rates this quarter. While we wouldn’t rule out a hike next week, our base case is that the Bank will deliver a hawkish policy statement that tees up a hike in March.

19 January 2022

Canada Data Response

Consumer Prices (Dec.)

Inflation rose to a 30-year high of 4.8% in December but is now close to a peak. We expect it to remain near its current level in the first quarter, before it falls sharply over the remainder of the year.

19 January 2022
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