July 5, 2023
Since January 2020, overnight index swap markets have failed to predict half of the 12 rate decisions by Canada’s central bank, writes National Bank economist Taylor Schleich. As the July 12 decision approaches, it is shaping up to be another difficult call.
The Bank of Canada has said it would consider the data in making the decision and there has been plenty since the June meeting.
While many think the Bank will hike its rate 25 basis points to 5 per cent this month, Capital Economics says that recent data have shown spare capacity opening up in the economy.
“Overall, the data and surveys [last] week make the case for another interest rate hike in July less compelling,” said Stephen Brown, Capital’s deputy chief North America economist. “We would estimate the odds at near 50/50, similar to those currently implied by overnight index swaps.”
Key data came early last week when inflation was shown to have slowed to 3.4 per cent in May. Capital thinks inflation will average 3.6 per cent this quarter, above the Bank’s forecast of 3.4 per cent. But there are still encouraging signs, with both CPI-trim and CPI-median core measures showing the smallest monthly gains in several months.
On the other side of the argument Canada’s economy showed more momentum than expected in May, with a preliminary estimate of 0.4 per cent. This suggests that second quarter growth will be stronger than the Bank’s forecast of 1 per cent, and lays a strong base for the third quarter, said Capital. Recession calls may need to be pushed back or cancelled.
However, Capital argues that GDP growth is still below the economy’s potential and spare capacity will open up, as shown in the Bank of Canada’s Business Outlook Survey, which came out Friday. The share of businesses unable to meet demand and those suffering labour shortages are now both lower than just before the pandemic.
This was supported by another piece of data last week that showed that job openings are down 21 per cent from their peak in April.
But there is one important data point yet to come: June job numbers on Friday. The economists at RBC say even though early cracks are beginning to show in Canada’s labour market, it won’t be enough to ward off another interest rate hike.
“Though there are signs that labour markets are softening, the unemployment rate is still historically very low,” said RBC economists Nathan Janzen and Carrie Freestone.
