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The Bank of Canada delivered a mixed message today, noting that it is more confident inflation will decline in the next few months, but less confident that inflation will fall all the way to 2.0% as quickly as previously anticipated. Nonetheless, with the …
12th April 2023
The 2023 Budget projects a much larger deficit than the prior Fall Economic Statement and, as a result, the government now agrees with our forecast that the debt-to-GDP ratio will rise. Roughly half of the hit to the budget projection is due to weaker …
28th March 2023
While the Credit Suisse rescue might draw a line under that particular institution’s problems, it is clear that confidence in the financial sector overall is still extremely fragile. So regardless of whether more financial institutions run into trouble, …
20th March 2023
Tentative signs of stabilisation, but risks abound House prices fell at a slower pace in February and the sharp improvement in the sales-to-new listing ratio offers some hope that they will soon stabilise. While the turmoil in the global banking sector …
15th March 2023
The Canadian banking sector is heavily concentrated, reducing the risk that deposit runs at small lenders might trigger a broader crisis of confidence for the entire sector. As things stand, the chance of the Bank of Canada soon cutting interest rates – …
14th March 2023
The Bank of Canada kept its policy rate unchanged at 4.5% today as expected but, with one eye on the strength of the recent US data and the Fed’s hawkish reaction to that, it sounded less confident that it could maintain the conditional pause in rates …
8th March 2023
Unseasonably warm weather provides little support The unseasonably warm start to 2023 provided little support to the housing market or construction, with sales and prices falling further in January while housing starts slumped to a 28-month low. As prices …
15th February 2023
The surge in employment in January highlights that some sectors are still recovering strongly and raises the prospect that the economy could avoid recession, although we still judge that a modest one is more likely than not. As the employment gains have …
14th February 2023
Overall services price growth has already slowed but, for the Bank of Canada to loosen policy, we will need to see far more convincing signs of lower inflation in the most labour-intensive service sectors. The Bank has stressed that it is following …
9th February 2023
The Bank of Canada accompanied its smaller 25 bp hike with new guidance that it intends to hold the policy rate at the current 4.5% while it assesses the impact of the cumulative interest rate increases so far. While the Bank did not rule out future …
25th January 2023
House prices fall further despite lower new listings The large fall in new listings in December failed to prevent another sizeable drop in house prices, but the improvement in the sales-to-new listing ratio offers some hope that the downward pressure on …
17th January 2023
The activity and labour market data imply the economy carried more momentum into 2023 than we expected, but the weakness of temporary employment suggests cracks are showing beneath the surface. The revised preliminary estimate that GDP edged up by 0.1% …
10th January 2023
Strong rental growth and higher mortgage costs will keep shelter inflation elevated for the next few months, but we expect it to fall sharply over the rest of 2023 as lower house prices feed through. Shelter inflation surprised to the upside of our …
5th January 2023
New listings fell in November but, because they are taking longer to sell, the inventory of homes for sale continued to rise. That is one reason to expect house prices to fall further, particularly if lenders fail to pass on the decline in wholesale …
15th December 2022
As several forecasters now seem to share our view that the economy will suffer a moderate recession next year, in this Update we discuss the risks that could result in a much deeper downturn. The key risk is that economists are underestimating the impact …
14th December 2022
The Canadian dollar has underperformed most other currencies over recent weeks, and we expect it to depreciate further against the US dollar over the first half of next year. The loonie has been the worst performer among major currencies since the US CPI …
9th December 2022
The Bank of Canada delivered a somewhat dovish 50bp rate hike today, by softening its explicit forward guidance that interest rates will need to rise further. Our GDP and inflation forecasts suggest there is little need for the Bank to raise rates …
7th December 2022
Although the annual rates of core inflation increased in October, we suspect the Bank of Canada will point to the declines in the 3-month annualised rates of CPI-trim and CPI-median to justify dropping down to a 25 bp interest rate hike at its meeting …
22nd November 2022
Weak new home sales weigh on housing starts The plunge in new home sales in Toronto in September points to further falls in housing starts, although there are at least some signs that the worst may be behind us for home sales and that the pressure on …
16th November 2022
The $6bn in new federal spending measures for this year, as outlined in the Fall Economic Update , amount to just 0.2% of GDP and will have little impact on the economic outlook or monetary policy. By utilising only a small part of the windfall from …
3rd November 2022
Governor Tiff Macklem shifted his tone notably today, reassuring that the Bank was “trying to balance the risks of over- and under-tightening”, whereas previously the emphasis had stressed that it was better to tighten too much rather than too little. …
26th October 2022
The surge in housing starts to a 10-month high in September casts doubt on our view that there is much worse still to come for residential investment, especially as the recent stabilisation of the sales-to-new listing ratio implies that the downward …
18th October 2022
Central banks have the tools to deal with liquidity crises arising from rising interest rates and falling asset prices. Instead, the bigger threat is that higher interest rates produce large and simultaneous falls in asset prices that threaten the …
11th October 2022
The public sector has been responsible for almost 90% of the rise in total employment since the pandemic and now accounts for the largest sustained share of employment since the early 1990s. The latest data show signs that this is being reversed, but …
13th September 2022
The Bank of Canada remains concerned about the risk of high inflation expectations becoming entrenched but, with the economy now slowing sharply and inflation set to ease by more than the Bank expected, we still see scope for it to follow the 75bp hike …
7th September 2022
The Canadian dollar has held up relatively well against the US dollar so far in 2022, but we think the factors underpinning the loonie’s resilience will fade and push it lower against the greenback over the next couple of years. The loonie has been the …
11th August 2022
The sharp increase in retirements this year presents downside risks to our forecasts for employment and, with GDP growth already faltering, further raises the probability that economic activity will contract. The fall in employment over June and July is …
9th August 2022
There is scope for inventory building to boost GDP growth in the near term but, as the US experience has recently demonstrated, this could raise the risk of GDP falling in the following quarters. Inventories are still unusually lean and would need to rise …
4th August 2022
Governor Tiff Macklem has voiced concern about the inflationary impact of the loonie, but we doubt that a modest fall would prevent the Bank of Canada from pausing its tightening before the Federal Reserve. At US$0.78, the loonie is far lower than the …
28th July 2022
The Bank of Canada’s 100 bp hike today and its accompanying communications have led us to upgrade our forecast for the policy rate to 3.5% by the October policy meeting, from 3.0%. As the commodity price and global supply chain assumptions underpinning …
13th July 2022
The Bank of Canada’s hawkishness, a widening of mortgage spreads, and news that at least one lender is restricting new loan applications suggest the outlook for house prices is worse than we previously feared. Lenders tripped over themselves to provide …
16th June 2022
The Bank of Canada’s recent communications suggest that it will be unfazed by the second consecutive double-digit drop in home sales in May. This raises the chance of the Bank enacting a larger interest rate hike at its meeting in July and leaves us …
7th June 2022
The Bank of Canada hiked its policy rate by another 50bp, to 1.5%, today and, after warning that "the risk of elevated inflation becoming entrenched has risen", closed the accompanying statement with an ominous hint that a 75bp hike was now on the table …
1st June 2022
The 10% fall in house prices that we expect over the next 12 months will also help to pull down CPI inflation, via its impact on shelter costs. Admittedly, shelter inflation is unlikely to decline meaningfully until 2023, because of soaring mortgage …
16th May 2022
The steep declines in home sales across Canada’s major cities reinforces our view that a downturn in residential investment will prevent the Bank of Canada from raising interest rates by as much as markets are now pricing in, particularly if – as looks …
4th May 2022
The Bank moved into full-blown hawkish mode today, hiking its overnight policy rate by 50bp to 1.00% and announcing that quantitative tightening will start later this month, with no caps on the value of maturing bond principal allowed to roll off each …
13th April 2022
The government announced a smorgasbord of new policies in the 2022 Budget, but the total increase in the budget deficit, at just $7bn, was arguably far lower than some feared. Moreover, as most of the funds are being allocated to new investments, rather …
7th April 2022
The government looks set to use its 2022 budget next week to outline a further increase in spending. While this will be modest in the context of the stimulus provided during the pandemic, it comes at a time when the economy is already operating at …
29th March 2022
The rise in mortgage rates implied by our new higher policy rate forecasts would reduce affordability by 12% over the next year which, in isolation, is not especially alarming when considering that the home sales-to-new listing ratio is still pointing to …
17th March 2022
The surge in commodity prices means that, after ending last year in deficit, the current account is set to move into a surplus of around 1.5% of GDP in the first half of this year. The fourth-quarter current account data, released last week, revealed a …
10th March 2022
Surging commodity prices have led us to substantially increase our forecasts for consumer price inflation, but the negative impact of higher prices on household purchasing power, and therefore real consumption, should be more than offset by stronger …
9th March 2022
Higher commodity prices and stronger immigration from Ukraine are potential benefits for Canada’s economy from the war in Ukraine, but there is a risk that near-term real GDP growth disappoints due to higher inflation. Canada’s trade links with Russia and …
2nd March 2022
The Bank of Canada’s decision to raise interest rates by 25bp today was widely expected and the statement supports our view that it will follow up with another hike next month, but there was little indication that the Bank intends to start quantitative …
Business investment has been much weaker in Canada than the US since the pandemic, which helps to explain why productivity growth has lagged. There are reasons to be optimistic about the next couple of years, but we are doubtful of the Bank of Canada’s …
16th February 2022
Higher oil prices would not provide as large a boost to the Canadian economy as in the past but, at a time when GDP is already set to rise above potential and inflation is well above target, they still raise the chance that the Bank of Canada could …
9th February 2022
One challenge for central banks as they consider reducing the size of their balances sheets is that, if they sell assets bought during the pandemic, they will likely face a financial loss. This is less of an issue for the Bank of Canada because it has an …
3rd February 2022
The Bank of Canada kept policy unchanged today but judges that the conditions to start raising interest rates have now been met, suggesting that it will hike its policy rate at the next meeting in March. Markets had given the Bank a green light to start …
26th January 2022
We expect the Bank of Canada to wait for the coronavirus restrictions to be lifted before starting to raise interest rates, suggesting it is more likely to begin hiking in March or April than at its meeting this month. OIS futures imply a near 50% chance …
12th January 2022
We expect GDP to grow strongly once the current restrictions are eased, but we are sceptical that either GDP growth or inflation will be as high this year as widely anticipated. This leads us to think the Bank of Canada will hike interest rates by 75 bp …
6th January 2022
The closure of many high-contact services in Quebec yesterday is likely to soon be matched by tighter coronavirus restrictions elsewhere. That said, if other provinces also allow stores and restaurants to stay open, then the hit to GDP will be smaller …
21st December 2021