The Bank of Canada raised the overnight rate by 25 basis points, to 4.75%, while stating that it will continue with Quantitative Tightening (QT).
The bank highlighted the resurgence in economic momentum by stating, “Canada’s economy was stronger than expected in the first quarter of 2023, with GDP growth of 3.1%. Consumption growth was surprisingly strong and broad-based, even after accounting for the boost from population gains. Demand for services continued to rebound. In addition, spending on interest-sensitive goods increased and, more recently, housing market activity has picked up.”
On rising prices, it stated that “prices for a broad range of goods and services coming in higher than expected. Goods price inflation increased, despite lower energy costs. Services price inflation remained elevated, reflecting strong demand and a tight labour market.”
On the future path of policy, the Bank will “be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target.”
Key Implications
The BoC leapt off the sidelines and jumped back in the game with a surprise rate hike. The Canadian economy has accelerated over 2023, with consumer spending leading the way. Robust employment gains and inflation-adjusted wage increases are enabling Canadians to keep spending in spite of high interest rates. With excess demand persisting, this will likely delay the timing of when inflation will be able to return to the 2% target.
There has also been a massive resurgence in the real estate market. Ever since the BoC paused on rate hikes earlier this year, the real estate market has returned to sellers’ territory, with sales and prices soaring. That had to be worrying the BoC, which doesn’t want to see financial imbalances balloon once again. We have highlighted the need for the BoC to actively lean against household imbalances when it sees them forming and the move today was a shot across the bow on that front.
Bet you can’t have just one. With today’s hike, the BoC is back in hiking mode. Economic data are pointing to more strength and the Bank has yet to see any sign from the labour market that the economy is turning. We expect the BoC to hike again in July, bringing the policy rate to 5%.
