The Canadian economy backs BoC's cautious rates

Overall growth was better-than-expected in first quarter

BY Bloomberg 23 May 2018

Canada’s economy continues to show signs of strength, but not enough to fuel inflation and prompt aggressive rate hikes – a scenario that validates the Bank of Canada’s cautious stance on monetary policy.

Inflation figures Friday by Statistics Canada showed few signs of any sharp lift in price pressures, even as the economy operates near its full capacity and gasoline prices rise. A separate retail sales report showed signs of life from consumers, who had been scaling back recently. The pair of releases adds to a run of data – including an unexpected jump in both imports and exports – that underscore the notion that demand remains solid.

Robust growth accompanied by benign underlying inflation marks a progression for the economy that reinforces expectations Bank of Canada policy makers will move ahead with more interest rate increases, but only gradually. After three hikes since July, investors are anticipating two more increases this year: in July and October.

“They would say things are pretty much unfolding as expected,” Mark Chandler, head of fixed income research at RBC Capital Markets in Toronto, said by phone. “You don’t accelerate the time table, you don’t push it back, you just follow through on it.”

Friday’s inflation data showed the consumer price index rising at an annual pace of 2.2% in April, down from 2.3% in March. A narrower gauge of core prices closely tracked by the central bank saw little change at 2%.

Retailers, meanwhile, recorded their largest sales gain in five months in March, as the nation’s households continued their car-buying binge.

The implied odds of a hike this month are now 28%, versus nearly 40% Thursday.

“The odds of a May rate hike were scaled back notably in the wake of the data – perhaps reflecting the fact that the previous pricing required a very strong set of figures today, and that didn’t happen,” Doug Porter, chief economist at Bank of Montreal, said in a note to investors.

After a slowdown that began in the second half of last year, most economists are anticipating growth will return to an above 2% pace in coming months and continue to put pressure on Bank of Canada Governor Stephen Poloz to raise interest rates. A slump in first-quarter growth is also turning out to be less severe than initially feared – the economy probably expanded at just under 2% in the first three months of 2018, better than the 1.3% predicted by the central bank last month.

Statistics Canada will release first-quarter GDP data on 31 May, the day after Poloz’s rate decision. At the bank’s last rate decision 18 April, officials reiterated they are in no rush to thwart the current expansion with aggressive rate hikes, particularly when plenty of headwinds remain such as uncertainty on global trade policy and the future of the North American Free Trade Agreement.