Economy continues to outperform, raising odds of rate hike next week

The Canadian economy grew faster than expected in the first three months of the year and likely expanded again in April, fuelling speculation that the Bank of Canada will raise interest rates again.

Statistics Canada reported Wednesday real gross domestic product grew at an annualized rate of 3.1% in the first quarter of 2023.

The latest data shows growth beat out the federal agency’s own forecast of 2.5% for the quarter. A preliminary estimate suggests the economy expanded by 0.2% in April after remaining flat in March.

The ongoing resilience in the economy is raising the odds of another rate hike, economists say, as the Bank of Canada heads toward its upcoming interest rate decision next week.

“The run of sturdy data undoubtedly raises the odds that the Bank of Canada needs to go back to the well of rate hikes, and even puts some chance on a move as early as next week’s policy decision,” BMO chief economist Douglas Porter said in a client note.

But Porter, along with other commercial bank economists, believe the central bank may delay the decision to raise rates again until the summer.

“However, given the uncertain backdrop and the possibility that inflation took a big step down in May, the Bank of Canada could opt to remain patient for a bit longer and signal that it’s open to hiking in July if the strength persists.”

The federal agency said growth in exports and household spending helped spur growth in the first quarter.

Meanwhile, slower inventory accumulations, as well as declines in household investment and business investment in machinery and equipment, weighed on growth.

The Canadian economy has managed to continue outperforming expectations, despite the Bank of Canada hoping high interest rates would cause a more profound pullback by consumers and businesses.

The household spending figures show spending up on both goods and services in the first three months of the year, after minimal growth in the previous two quarters.

However, Statistics Canada noted that disposable income fell for the first time since the fourth quarter of 2021. The federal agency says disposable income declined by 1%, largely due to the expiration of government measures aimed at helping people cope with inflation.

The central bank paused its rate-hiking cycle earlier this year, keeping its key interest rate at 4.5% — the highest it’s been since 2007.

But the central bank’s governor, Tiff Macklem, has signalled that the bank is still trying to figure out if interest rates are high enough to quash inflation.

The headline inflation rate ticked up slightly to 4.4% in April, remaining well above the central bank’s 2% target.

Nojoud Al Mallees, The Canadian Press

Nojoud Al Mallees is a reporter with The Canadian Press, a national news agency headquartered in Toronto and founded in 1917.