By Max Sato
But given above-target inflation and tight labor market conditions, economists also expect the bank to maintain its tightening bias, reminding that it is prepared to act if necessary, and will consider conducting a 25-basis point rate hike in July after digesting more economic data.
The bank is scheduled to announce its next monetary policy decision on July 12, when it also provides medium-term growth and inflation forecasts and risk analysis in its quarterly Monetary Policy Report.
Avery Shenfeld, chief economist at CIBC Capital Markets pointed out that the Bank
of Canada is in the uncomfortable position of having to make a rate announcement on Wednesday before seeing the May jobs data on Friday.
“By using the June announcement to issue a stern warning that a rate hike could well be in the cards for July, they can keep bond yields and mortgage rates elevated, while putting off the decision until they have that data,” he wrote in a commentary.
The Labour Force Survey for May is forecast to show employment grew 20,500 following a stronger-than-expected rise by 41,400 in April. The unemployment rate is seen edging up to 5.1% from 5.0%.
Households and businesses will feel the cumulative effects of the rate hikes but the domestic economy’s resilience will put pressure on the BOC to raise interest rates further, Nathan Janzen, assistant chief economist at RBC Economic, wrote in a report.
He expects Governing Council to actively discuss a hike on Wednesday, “but we think they’ll wait until July to see if more evidence accumulates in favour of a rate increase.”
Canada’s gross domestic product grew an annualized 3.1% in the January-March period on relatively mild winter and resilient consumer spending, rebounding from a 0.1% contraction in the final quarter of 2022. It was above the early estimate of 2.5% and the BOC’s 2.3% forecast made in April.
The flash estimate for April GDP by Statistics Canada is a 0.2% increase despite the public sector strike in the second half of the month. This shows there is more underlying momentum in the economy than anticipated, said Douglas Porter, chief economist at BMO Financial Group. BMO will be revising up its April-June GDP forecast from what had been a small drop to a small positive.
“The bank will have the luxury of only one more CPI report (on June 27) before their July 12 decision, but we now expect them to hike by 25 bps at that later meeting,” Porter wrote in a report. “For now, we are thus boosting our call by only that one extra quarter-point hike, with rates then likely to hold at 4.75% through the second half of the year.”
Total consumer prices rose 4.4% on the year in April, ticking up from 4.3% in March, but it is still slower than 5.2% in February and the recent peak of 8.1% recorded in June 2022.
In its April policy decision, the bank said it “expects CPI inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024.”
“Recent data is reinforcing Governing Council’s confidence that inflation will continue to decline in the next few months,” it said. “However, getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize.”
Scotia Economics dissented from the majority view in calling for a 25bps rate hike at this meeting accompanied by continued guidance that leaves the door open to further tightening by largely retaining something either identical or very similar to the final paragraph’s guidance in recent statements.