Clearer signs of a cooling economy in the second quarter and a weaker July forecast will likely be enough to convince the Bank of Canada to hold rates steady at its meeting next week.
(Bloomberg) — Clearer signs of a cooling economy in the second quarter and a weaker July forecast will likely be enough to convince the Bank of Canada to hold rates steady at its meeting next week.
The gross domestic product figures due Friday are the last key input before the central bank’s decision on Sept. 6. Economists in a Bloomberg survey expect June output to shrink 0.2%, this year’s first contraction, ending the quarter with 1.2% annualized growth.
That would be slower than the bank’s 1.5% projection and a deceleration from the 3.1% pace in the first three months of 2023. If accompanied by a marked slowdown in consumption, that result may give Governor Tiff Macklem and his officials greater confidence that the cumulative weight of 475 basis points of hikes is helping to slow the economy and bring inflation to heel.
Since the last rate increase on July 12, economic signals have been mixed. Inflation reaccelerated last month after slowing to within the bank’s control range in June and underlying measures remain sticky.
The economy shed jobs in July, but wages grew faster amid rising strike activity and union workers winning bigger paychecks. Retail data pointed to some weakness in demand for core goods, but services spending — details of which will be revealed Friday — may still be strong.
If Statistics Canada’s July output estimate points to further softness at the start of the third quarter, the case for the central bank to step to the sidelines would get stronger. On the other hand, better-than-expected growth and clear momentum in domestic demand — especially if driven by consumer spending — are likely to boost the odds of another hike.
The majority of economists in a Bloomberg survey expect officials to keep the overnight rate at 5% and most think the Bank of Canada is finished tightening monetary policy. Only three of 32 forecasters so far predict a 25 basis-point hike next Wednesday.
Economists who see a pause say there are already signs of cracks emerging, with the country’s heavily indebted households starting to tighten their spending. Those expecting a hike argue the bank may want to snuff out momentum to prevent a rebound in consumption. Unexpected strength in household spending earlier this year was a major reason the central bank raised rates in June and July.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.