PANEL: Two top economists weigh in on what the BoC will do following Canada's Q3 GDP data
Economists are expecting the Bank of Canada will hold interest rates at its key policy announcement this week, with some saying they expect the central bank to be done hiking rates.
Economists tracked by Bloomberg are calling for a hold at five per cent as of Friday, with the median estimate coming in at that level. The Bank of Canada will make its interest rate announcement next Wednesday, after electing to hold interest rates at five per cent in its previous two announcements in October and September.
James Orlando, director at TD Economics, said in a note Thursday that there is “no reason for the Bank of Canada to hike again.”
“We expect below trend economic growth to continue over the coming months, which will push inflation gradually closer to the two-per-cent target. This will give the (Bank of Canada) a few months before it starts to prepare markets for rate cuts, which we expect will start in April 2024,” he said.
Orlando’s note came in response to gross domestic product (GDP) data in the third quarter, which included a downside surprise that the economy shrank 1.1 per cent over that period.
He said the reason Canada’s central bank raised interest rates in June and July was due to first-quarter growth rising amid an increase in housing demand. Orlando said this was “short-lived” and spending, employment gains and inflation have since slowed.
In June, Canada’s central bank increased interest rates by 25 basis points to 4.75 per cent and did the same in July, bringing the policy rate to five per cent.
Douglas Porter, chief economist at the Bank of Montreal, said in a note Thursday responding to GDP data that growth in the second quarter was “revised heavily upward to a rise of 1.4 per cent.”
Porter said following the downside surprise GDP figures in the third quarter, second quarter revision and a “decent start” to the fourth quarter, the data is “nearly a wash.”
“Overall, today's mixed report reinforces the point that the Bank is done hiking rates, but doesn't really advance the cause for rate cuts, as the economy isn't showing signs of further deterioration early in Q4,” he said in the note.
Andrew Grantham, a senior economist at CIBC Capital Markets, wrote in a note Thursday week that third-quarter GDP figures “will do little” to alter the Bank of Canada’s confidence in its projected timeline.
Tu Nguyen, an economist at RSM Canada, said in a note Thursday that as the economy contracted more than anticipated in the third quarter, the discussion on a potential rate cut becomes relevant.
“The Bank of Canada might announce the first rate cut in April 2024 to avoid a deeper recession than needed,” Nguyen said.
On Friday Statistics Canada reported that Canada’s unemployment rate rose to 5.8 per cent last month, as higher interest rates weighed on the creation of new jobs amid a growing population.
Nguyen said in a note Friday that weak GDP figures in the third quarter coupled with November’s job report should shift the focus from rate increases to rate cuts, provided inflation stays “in check.”
The unemployment rate has trended upward since April of this year, according to Nguyen, who said the period of “data painting a mixed picture” appears to be ending as most economic data currently indicates an economic slowdown.
“Looking ahead, the economy might still add jobs but unemployment will rise to low six per cent by early 2024 as population growth outpaces job growth. Hiring will be slow until mid-2024 as businesses delay investments and grapple with a more challenging economic environment,” Nguyen said.
With files from the Canadian Press