The trend has serious implications on the central bank's interest rate strategy
The Canadian economy continues to exhibit remarkable resilience with its consistently strong numbers over the past few months – and the momentum is currently showing no signs of stopping, according to BMO Economics.
Q1 GDP growth settled at a level significantly higher than the Bank of Canada’s forecast, mainly due to the lagging effect of rate hikes, unleashed pent-up demand, continued tightness in the labour market, and population growth.
These factors will together prove to be “a reasonable rationale” for the central bank to continue with its rate hikes, according to Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist of fixed income strategy.
Additionally, “home sales turned higher after the BoC’s January pause signal, and prices have followed suit in the past couple of months despite mortgage rates rising substantially over the past year,” Reitzes said.
“If the most interest rate sensitive part of the economy isn’t buckling under the pressure of higher rates, then policy rates likely aren’t high enough.”
Reitzes is not expecting upcoming data such as the consumer price index for May to change the outlook for another 25-basis-point hike at the central bank’s next policy meeting, scheduled on July 12.
“The picture on the core metrics is expected to be much less favourable, supporting the case for further BoC tightening,” he said. “We anticipate another acceleration in May.”
“Growth is expected to stay relatively robust, especially considering the dampening impact of April’s public sector strike. Meanwhile, sentiment looks to remain on the soft side with higher rates and inflation weighing on the outlook.”
