Aug 1, 2024
Latest GDP numbers: What they mean for the Bank of Canada’s next rate decision
The Bank of Canada held its key interest rate at 5.00%, meaning no change in rates for existing variable-rate mortgage holders.
While that was fully expected, markets ended up focusing more on the fact the Bank of Canada removed its rate-hike bias in its accompanying statement.
For the first time in months, the Bank dropped previous assertions that it "remains prepared to raise the policy rate further if needed."
Instead, during a post-announcement press conference, BoC Governor Tiff Macklem told reporters that “there was a clear consensus to maintain our policy at 5%” among the Governing Council. He added that the deliberations had shifted from “whether monetary policy is restrictive enough to how long to maintain the current restrictive stance.”
Observers say this likely paves the way for rate cuts a little later in the year.
“On balance, the statement is marginally more dovish than we’d expected, and the shifting stance advances the process towards an eventual policy rate pivot,” economists from National Bank wrote.
“We expect the Bank of Canada to further dial down its hawkish signalling, and remain of the view that the Bank will begin cutting rates this spring,” added Randall Bartlett, Senior Director of Canadian Economics at Desjardins.
Still concerns over inflation
The Bank of Canada did, however, reiterate that it remains concerned about underlying inflation pressures, one of which it acknowledged is shelter costs, which is now the leading contributor to headline inflation growth. Specifically, mortgage interest costs, which have been impacted directly by the Bank’s own rate hikes, are up 29% year-over-year, while rent costs are up 9%.
“Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour,” the Bank said.
The Bank said Canada’s economy has “stalled” since the middle of 2023, and that continued weak economic growth is likely to continue contributing to a decline in inflation over the course of the year.
In its latest economic forecasts released in its Monetary Policy Report, the BoC said it expects real GDP growth of just 0.8% before returning to 2.4% in 2025.
It also sees inflation remaining near 3% for the first half of the year, before gradually returning to its target level of 2% in 2025.
While the Bank’s official forecast is for Canada to avoid a technical recession, some economists think that may be overly hopeful.
“We think the Bank’s outlook is still too optimistic,” Bartlett added. “We expect a short and shallow recession in Canada starting in the first half of 2024. Sustained mortgage renewals at higher interest rates, slower population growth, and CEBA loan repayments will all apply further downward pressure to an already lacklustre outlook.”