Will the Bank of Canada raise rates again? This week will decide

Anyone worried about interest rates, economic growth and job numbers is bracing for a busy week with many ramifications. Canadians will be hit by a tsunami of economic data over the next 10 days.

The latest inflation numbers, data on how much the Canadian economy is cranking and a key read on consumer sentiment will not only tell us how the economy has performed in the first half of the year, they will also drive policy decisions that will determine how the rest of the year will pass.

“I would say it’s very important,” said RBC economist Carrie Freestone.

Freestone said she believes the Bank of Canada will likely raise rates when it meets on July 12, but this week’s data should tell us everything we need to know about the bank’s decision.

“We think they’re going to 25 (bps). They should run higher if we’re in a situation where expectations aren’t tamed,” she told CBC News.

The Bank of Canada has aggressively raised interest rates in an effort to contain inflation. The theory is that as rates rise, consumers will be pressured by higher debt payments.

With more money going towards paying off their debts, Canadians have less to spend elsewhere. That tends to slow down the economy and drive down prices – which is exactly what the Bank of Canada is trying to do with rate hikes in the first place: to reduce inflation.

The problem is that for most of this year, economic data has been hotter than expected.

Gross domestic product, the total value of all goods and services produced by the country’s economy, grew at an annualized rate of 3.1 percent in the first quarter of 2023. Canadian employers have added more than 230,000 jobs so far this year.

And just last week, retail sales showed that Canadian consumers are still spending at rates that don’t show the economy is slowing.

“In some ways, it feels like in the Road Runner when Wile E. Coyote runs off a cliff and he just hasn’t looked down yet,” said Randall Bartlett, senior director of Canadian Economics at Desjardins Group.

“Households are coming under increasing pressure, but they continue to behave in ways that don’t necessarily reflect the reality of higher borrowing costs and higher inflation,” Bartlett said.

And that’s why this week’s data is so important.

Prices continue to rise, but more slowly

Economists polled by Bloomberg say annual inflation numbers will show a sharp slowdown in price growth. Inflation peaked at 8.1 percent last summer. Prices continue to rise, but at an increasingly slower pace.

Last month, Statistics Canada said prices had begun to rise again. On an annual basis, the total percentage rose from 4.3 percent to 4.4 percent.

Economists expect solid progress this week in the fight to contain inflation. According to RBC’s forecast, headline inflation is likely to have fallen to 3.6 percent.

“It’s a huge drop,” said RBC’s Claire Fan. “But much of that decline can be explained by lower energy prices.”

Last May, gas prices rose inexorably to a peak of over $2 a liter. Compare that to gas prices in May of this year, where they fluctuated between $1.50 and $1.60.

Fan says the drop will help consumers weather higher prices. But she says the Bank of Canada looks to see a continued decline in a measure of inflation that economists call the core interest rate, as volatile things like gasoline and food, which often go up and down, are taken out.

She says the central bank will also keep a close eye on GDP figures.

Her forecast shows that economic growth will remain flat in April. But Fan says there was a Public Service Alliance of Canada strike that month. If you ignore the economic impact of that, she says the economy grew again in April.

Most economists assume that a rate hike is imminent

GDP and inflation data give the likes of Fan and others hard numbers to gauge how the economy is doing, but two central bank releases due this week should paint a picture of how Canadian businesses and consumers are feeling .

The Business Outlook Survey tells us how companies feel about the current economy and how they expect to adjust hiring and investment over the remainder of the year. Similarly, the consumer expectations survey gives an idea of ​​how households are coping with inflation and higher borrowing costs and whether they plan to curb consumer spending.

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At this point, most economists assume that the Bank of Canada has another rate hike in store. The bank has repeatedly said that the dangers of high inflation threaten everyone and could turn financial stability upside down. Bank of Canada Governor Tiff Macklem has said he needs to see economic growth slowing further as proof of the kind of progress the bank is looking for.

For example, Fan said she thinks significant changes to the forecast are needed before the bank balks at another rate hike.

“Substantial downside surprises in data releases (i.e., lower inflation and/or GDP data) are likely to be needed to avoid another hike at the next meeting in July,” she wrote in a note to clients.

But if there’s been one constant in these three and a half years or so, it’s that every time economists say they have a handle on what’s going to happen next, the data comes as a surprise.