The Bank of Canada is seeing the economy performing better than expected with inflation remaining higher than desired. The Bank moved off the sidelines last month and raised rates by 25 basis points. The question is, will the Bank raise the overnight rate by another 25 basis points this month? Below we look at the most recent data releases to get a sense of what the Bank might do.
The Canadian economy shed 17,300 jobs in May, the first decline in nine months. This came as a surprise to analysts who were expecting the economy to add 23,000 jobs last month. The number of employees held steady in the private and public sector, while there was a decline in the number of self-employed workers (-40,000). The unemployment rate ticked up to 5.2%.
After the surprise increase in inflation in April, headline inflation slowed to 3.4% year-over-year in May. Lower energy prices drove over 60% of the decline. The Bank’s preferred CPI-trim and median measures both eased substantially in May to 3.8 and 3.9%, respectively, year-over-year, on relatively small 0.2% one-month increases from April.
Headline inflation in June is likely to fall further – potentially to the top end of the Bank’s 1-3% target range – driven by a year-over-year decline in energy prices. Getting to the Bank’s 2% target will be the challenge. While progressing lower, the underlying inflation trend is still running well above this target.
| Canadian CPI Inflation | ||||
| Feb-23 | Mar-23 | Apr-23 | May-23 | |
|
m/m % change |
||||
| All Items CPI | 0.4 | 0.5 | 0.7 | 0.4 |
| Food | 0.6 | 0.2 | 0.4 | 0.8 |
| Energy | -1.2 | 0.7 | 3.3 | -0.8 |
| All items ex-food & energy | 0.5 | 0.6 | 0.5 | 0.4 |
|
y/y % change |
||||
| All Items CPI | 5.2 | 4.3 | 4.4 | 3.4 |
| Food | 9.7 | 8.9 | 8.3 | 8.3 |
| Energy | -0.6 | -6.9 | -4.2 | -12.4 |
| All items ex-food & energy | 4.8 | 4.5 | 4.4 | 4.0 |
Source: Statistics Canada
Mortgage interest costs and home rent prices continue to be a major contributor to CPI growth. Inflation for mortgage interest costs in May was the highest on record at 29.9%. We expect that these costs will continue to rise as higher interest rates gradually flow to household mortgage payments. While consumers are being squeezed, the question is whether the Bank feels that further belt tightening is required.
The Bank of Canada Q2 Business Outlook Survey shows an easing in sentiment. The factors highlighted in the Bank’s June policy statement all improved: lower expected price increases, easing wage pressures, waning excess demand, and lower inflation expectations.
After an increase in March, GDP was flat in April, falling short of market expectations. While the federal public sector strike was partly responsible for the weak performance, GDP excluding federal government output grew only 0.1%. In April we saw declines in several private sector industries – management, wholesale trade, and agriculture. Interest rate sensitive sectors such as real estate and non-residential construction improved. Residential construction continued its ongoing six-month decline.
The flash estimate for May (+0.4%) is driven by a return of the federal public sector and improvements in manufacturing and wholesale trade. Assuming the May estimate holds and June is flat, Q2 GDP would be 1.4% – higher than the Bank of Canada’s recent forecast of 1.0% . This would support the Bank’s decision to raise rates, but ongoing population growth has certainly raised potential growth much higher than had been expected.
Overall, while this data suggests the economy is losing momentum, we expect that the Bank will hike the overnight rate by 25 bp on July 12 before stepping back to the sidelines for the rest of the year.
Independent Opinion
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