Canadian Inflation Rises to 3.5% Y/Y in December – A Bumpy Road to the Inflation Target

Latest News Kim Stenberg 18 Jan

Canada’s headline inflation number for December ’23 moved up three bps to 3.4%, as expected, as gasoline prices didn’t fall as fast as a year ago. These so-called base effects were also evident in the earlier US inflation data for the same month.

Additional acceleration came from airfares, fuel oil, passenger vehicles and rent. Prices for food purchased from stores rose 4.7% yearly in December, matching the increase in November (+4.7%). Moderating the acceleration in the all-items CPI were lower prices for travel tours.

On a monthly basis, the CPI fell 0.3% in December after a 0.1% gain in November. Lower month-over-month price movements for travel tours (-18.2%) and gasoline (-4.4%) contributed to the monthly decline. The CPI rose 0.3% in December on a seasonally adjusted monthly basis.

Two key yearly inflation measures that are tracked closely by the Bank of Canada and filter out components with more volatile price fluctuations — the so-called trim and median core rates — increased, averaging 3.65%, from an upwardly revised 3.55% a month earlier. That’s faster than the 3.35% pace expected by economists. The trim rate rose due to the movements of rent and passenger vehicle prices.

Another important indicator, a three-month moving average of underlying price pressures, rose to an annualized pace of 3.63% in December from 2.94% in November, according to Bloomberg calculations. The Bank of Canada follows this metric closely because it reveals shorter-term inflation trends.

According to Bloomberg News, following the release of today’s CPI data, “the yield on two-year Canadian government bonds rose about four basis points to 3.857%…Traders in overnight swaps pushed back bets on when the Bank of Canada will start cutting rates to July, from as early as April before the release.”

Bottom Line

This is the last major data release before the Bank of Canada meets again on January 24th. I concur with the widely held view that the rate pause will continue at the next meeting despite evidence that the economy is slowing. Governor Tiff Macklem will err on the side of caution before beginning to cut overnight rates. The last reading on wages showed a 5.4% y/y rise, and yesterday’s housing release showed a bump in sales. Macklem and Co. will keep their powder dry until they see an all-clear signal that core inflation is sustainably below 3%.

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

Economic Slowdown: The Table is Set for Rate Cuts in 2024

Latest News Kim Stenberg 30 Nov

Q3 GDP Weaker Than Expected Paving the Way for Future Rate Cuts

The Canadian economy weakened far more than expected in the third quarter, down 1.1% annually. However, the Q2 figures were revised up significantly from a 0.2% decline to a rise of 1.4%. Such are the vagaries of economic data. The Canadian economy is contracting despite the positive impetus of rapid population growth. Household consumer spending flatlined, and the savings rate rose, confirming that the central bank’s aggressive interest-rate hikes are doing their job to slow economic activity.

Statistics Canada also released preliminary data suggesting that GDP grew 0.2% in October, boosted by residential construction and increased oil and gas extraction and retail trade, after the better-than-expected 0.1% expansion in September.

The economic contraction was broadly based. Household spending hasn’t been this weak since 2009, except during the pandemic lockdowns. In addition, business investment was particularly feeble, down 14.4% for business equipment and -7.7% for nonresidential construction. Exports also declined 5.1% over the same period.  Investment in residential construction rose 8.3% annualized, the first increase since the beginning of 2022.

Job vacancy data, also released today, posted another decline, confirming that the economy has weakened and excess demand has been eliminated. On a per capita basis, Canada’s economy has contracted for the second consecutive quarter.

Tomorrow, Statistics Canada will release the labour market report for November.

Bottom Line

Today’s release is welcome news for the Bank of Canada. Tiff Macklem said last week that the Bank’s interest rate hikes were doing their job to return inflation to its 2% target. The Governing Council meets once again on December 6th. We expect a more dovish press release suggesting that the policy rate has likely peaked. Market-driven interest rates have fallen sharply since early October, taking fixed mortgage rates down significantly (see chart below).

Traders in overnight swaps are betting the Bank of Canada will loosen monetary policy as early as April 2024, little changed from before the release. I expect that the Bank of Canada will gradually cut interest rates beginning in the second quarter of next year, taking the overnight rate down 200 basis points to 3.0% by year’s end.

 

Dr. Sherry Cooper  |  Chief Economist, Dominion Lending Centres

Canadian Inflation Fell to 3.1% (y/y) in October, Ensuring the Bank of Canada Holds Rates Steady

Latest News Kim Stenberg 23 Nov

GOOD NEWS on the Inflation Front Suggests Policy Rates Have Peaked

Today’s inflation report showed a continued improvement, mainly due to falling year-over-year (y/y) gasoline prices. The October Consumer Price Index (CPI) rose 3.1% y/y, down from the 3.8% rise in September. There were no surprises here, so markets moved little on the news. Excluding gasoline, the CPI rose 3.6% in October, compared to 3.7% the month before.

The most significant contributors to inflation remain mortgage interest costs, food purchased at stores, and rent.
Canadians continued to feel the impact of rising rent prices, which grew faster (y/y) in October (+8.2%) than in September (+7.3%). The national increase reflected acceleration across most provinces. The most significant increases in rent prices were seen in Nova Scotia (+14.6%), Alberta (+9.9%), British Columbia (+9.1%) and Quebec (+9.1%).
Property taxes and other special charges, priced annually in October, rose 4.9% yearly, compared with a 3.6% increase in October 2022. The national increase in October 2023 was the largest since October 1992, with homeowners paying more in all but one province, as municipalities required larger budgets to cover rising costs. Property taxes in Manitoba (-0.3%) declined for the third consecutive year, mainly due to reduced provincial education tax.

While goods prices decelerated by -1.6% as prices at the pump fell, prices for services rose 4.6% last month, primarily driven by higher prices for travel tours, rent and property taxes.

While grocery prices remained elevated, they also continued their trend of slower year-over-year growth, with a 5.4% increase in October following a 5.8% gain in September. While deceleration continued to be broad-based, fresh vegetables (+5.0%) contributed the most to the slowdown.

Excluding food and energy, inflation fell to 2.7% in October, down a tick from the September reading. Two other inflation measures closely tracked by the Bank of Canada–the so-called trim and median core rates–also eased, averaging 3.6% from an upwardly revised 3.8% a month earlier.

Bottom Line

According to Bloomberg calculations, another critical measure, a three-month moving average of underlying price pressures, fell to an annualized pace of 2.96% from 3.67% a month earlier. It’s an important metric because Bank of Canada Governor Tiff Macklem has said policymakers are tracking it closely to understand inflation trends.

Today’s news shows that tighter monetary policy is working to bring down the inflation rate. In its Monetary Policy Report last month, the Bank of Canada expected the CPI to average 3.5% through mid-2024. Cutting its economic forecast, the Bank forecasted it would hit its 2% inflation target in the second half of 2025.

Given today’s data and the likely significant slowdown in Q3 GDP growth, released on November 30, and the Labour Force Survey for November the following day, policy rates have peaked. Governor Tiff Macklem will give a speech on the cost of high inflation in New Brunswick tomorrow, and the subsequent decision date for the Governing Council is December 6th. The Bank’s inflation-chopping rhetoric may be relatively hawkish, but the expectation of rate cuts could spur the spring housing market.

The economists at BMO have pointed out that “three provinces now have an inflation rate below 2%, while only three are above 3%, so much of the country is already seeing serious signs of stabilization. (Unfortunately, the two largest provinces have the fastest inflation rates—Quebec at 4.2% and Ontario at 3.3%).” There is no need for the Bank to raise rates again, and they could begin to cut interest rates in the second quarter of next year.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Inflation Dips to 3.8% Keeping BOC on the Sidelines

Latest News Kim Stenberg 19 Oct

Good News on the Inflation Front Suggests Policy Rates Have Peaked

Today’s inflation report for September was considerably better than expected, ending the three-month rise in inflation. Not only did the headline inflation rate fall, but so did the core measures of inflation on a year-over-year basis and a three-month moving average basis. This, in combination with the weak Business Outlook Survey released yesterday, suggests that the overnight policy rate at 5% may be the peak in rates. While I do not expect the Bank to begin cutting rates until the middle of next year, the worst of the tightening cycle may well be over.

Offsetting the deceleration in the all-items CPI was a year-over-year increase in gasoline prices, which rose faster in September (+7.5%) compared with August (+0.8%) due to a base-year effect. Excluding gasoline, the CPI rose 3.7% in September, following a 4.1% increase in August. Looking ahead to the October inflation report, the base effect for headline CPI is favourable, as CPI surged in October 2022. Gasoline prices are down about 7% so far this month. Given the war in the Middle East, however, there is no guarantee that this will hold, but if it does, the October headline CPI could move into the low-3% range.

On a monthly basis, the CPI fell 0.1% in September after a 0.4% gain in August. The monthly slowdown was mainly driven by lower month-over-month prices for gasoline (-1.3%) in September. Goods inflation fell 0.3% from a month earlier, the first time since December 2022, and grew 3.6% from a year ago versus 3.7% in August. Services inflation was unchanged from August, the first time it hasn’t grown on a monthly basis since November 2021, while the rate slowed to 3.9% on a yearly basis, from 4.3% in August.

Yesterday’s Survey of Consumer Expectations showed that perceptions of current inflation remain well above actual inflation.  One reason is the very visible level of grocery and gasoline prices. As the chart below shows, food inflation–though still elevated–decelerated to 5.9% last month, and CPI excluding food and energy fell to a cycle-low 2.8%. Large monthly gains in September 2022, when grocery prices increased at the fastest pace in 41 years, fell out of the 12-month movements and put downward pressure on the indexes.

Prices for durable goods rose at a slower pace year over year in September (+0.4%) compared with August (+1.4%). The purchase of new passenger vehicles index contributed the most to the slowdown, rising 1.7% year over year in September, following a 3.1% gain in August. The deceleration in the price of new passenger vehicles was partly attributable to improved inventory levels compared with a year ago.

Additionally, furniture prices (-4.6%) and household appliances (-2.3%) continued to decline year-over-year in September, contributing to the slowdown in durable goods. Consumers paid less on a year-over-year basis for air transportation (-21.1 %) in September, coinciding with a gradual increase in airline flights over the previous 12 months.

Other measures of core inflation followed by the Bank of Canada also decelerated.

Bottom Line

According to Bloomberg News calculations, “A three-month moving average of underlying price pressures that Governor Tiff Macklem has flagged as key to policymakers’ thinking fell to an annualized pace of 3.67%, from 4.29% a month earlier.”  While this is still well above the Bank’s 2% target, the global economy is slowing, the Canadian and US economies are slowing, and with any luck at all, the Bank of Canada might see inflation move to within its target range next year. However, the central bank will be cautious, refraining from rate cuts until the middle of next year. The full impact of rate hikes has yet to be felt. The next move by the Bank of Canada could be a rate cut, but not until next year.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

Strong September Jobs Report Will Test Bank of Canada’s Patience

Latest News Kim Stenberg 11 Oct

Canadian employment rose by a whopping 63,800 in September, tripling market expectations. The underlying data put the strong job growth into perspective. Most of the gains in overall employment were in part-time work, and total hours worked declined by 0.2%.  Moreover, the unemployment rate held steady for the third consecutive month at 5.5% due to a surge in the labour force.

The country’s population rose by 2.9% in the year ending July 1, one of the world’s fastest growth rates, bringing the number of residents to 40.1 million. The jump was driven by the largest recorded increase in temporary residents in data going back to 1971. Many of these temporary workers, foreign students and immigrants will opt to remain in Canada, increasing the pressure on Canadian housing markets. The number of non-permanent residents in Canada — including people on work or study permits and refugees — is now 2.2 million, or more than 5% of the total.

Even more notable for the Bank of Canada was the continued upward pressure on wages. Average hourly earnings increased by 5.0% y/y last month. Workers are pressing for higher wages in many sectors as increases in compensation have yet to keep up with inflation. Key unions, such as auto and health care employees, are striking in the US. The favourable deal cut after the writers’ strike portends broadening labour market unrest.

Policymakers will continue scrutinizing incoming economic data to determine if the current interest rates are sufficiently high to return inflation to 2%. They are particularly concerned about substantial wage gains perpetuating wage-price spiralling.

Bottom Line

The Bank of Canada will maintain its tightening bias when it meets again on October 25th. Today’s report will not likely trigger another rate hike but will keep the central bank on edge.

The recent rise in market-driven interest rates, particularly at the longer end of the yield curve, reflects the strength in the U.S. economy and continued jitters about inflation and the chaos in Congress. Today’s employment report in the U.S. was very strong.

The U.S. jobs data are consistent with a meaningful acceleration in U.S. GDP growth in the third quarter. U.S. bond yields are at the upper end of their one-year trading range, and Canadian government bond yields generally follow U.S. trends. The Fed is widely expected to raise rates at least one or two more times.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

BANK OF CANADA RATE ANNOUNCEMENT: Holds Rates Steady Acknowledging Economic Slowdown

Latest News Kim Stenberg 6 Sep

With last Friday’s publication of the anemic second-quarter GDP data, it was obvious that the Bank of Canada would refrain from raising rates at today’s meeting. Economic activity declined by 0.2% in Q2; the first quarter growth estimate decreased from 3.1% to 2.6%.

Today’s press release announced, “The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures.” The Q2 slowdown in output reflected a “marked weakening in consumption growth and a decline in housing activity, as well as the impact of wildfires in many regions of the country. Household credit growth slowed as the impact of higher rates restrained spending among a wider range of borrowers. Final domestic demand grew by 1% in the second quarter, supported by government spending and a boost to business investment. The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4% to 5%.”

Lest we get too comfy with a more dovish stance in monetary policy, the central bank warned that the Governing Council remains resolute in its commitment to restoring price stability.

Inflationary pressures remain broad-based. CPI inflation rose to 3.3% in July after falling to 2.8% in June. Much of the rise in July was caused by the statistical base effect. Nevertheless, current harbingers of inflation remain troubling. The increase in gasoline prices in August will boost inflation soon before easing again. “Year-over-year and three-month measures of core inflation are now running at about 3.5%, indicating little recent downward momentum in underlying inflation. The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability.”

The Bank also continues to normalize its balance sheet by letting maturing bonds run off. This quantitative tightening keeps upward pressure on longer-term interest rates.

Tiff Macklem and company concede that excess demand is diminishing and the labour markets are easing. The unemployment rate rose to 5.5% in July, up from a cycle low of 4.9%, and job vacancies continue to decline. Net exports have slowed, and the Chinese economy has weakened sharply. Consumers are tightening their belts as the saving rate rose and household spending slowed markedly in Q1.

Monetary policy actions have a lagged effect on the economy. As mortgage renewals rise, peaking in 2026, the economic impact of higher interest rates will grow. Homeowners renewing mortgages this year are seeing roughly a doubling in interest rates.

The Governing Council will focus on the movement in excess demand, inflation expectations, wage growth and corporate price decisions.

Bottom Line

The Bank of Canada, though independent, is coming under increasing political pressure. In an unusual move, the premiers of both BC and Ontario have publicly called for a cessation of rate hikes. Even so, the BoC is keeping its hawkish bias to avoid a bond rally that could trigger another boost in the housing market, similar to what we saw last April. The government bond yield is hovering just under 5%, having breached that level recently with the release of robust US economic data.

There are two more meetings before the end of this year, and many are expecting another rate hike in one of those meetings. The odds of this are less than even, given the downward momentum in the economy.

The central bank’s next decision is due October 25, after two releases of jobs, inflation and retail data, gross domestic product numbers for July and an August estimate.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

 

Rate Hikes Off the Table with Weak Q2 GDP Growth in Canada

Latest News Kim Stenberg 1 Sep

The Canadian economy weakened surprisingly more in the second quarter than the market and the Bank of Canada expected. Real GDP edged downward by a 0.2% annual rate in Q2. The consensus was looking for a 1.2% rise. The modest decline followed a downwardly revised 2.6% growth pace in Q1. (Originally, Q1 growth was posted at 3.1%.) According to the latest monthly data, growth dipped by 0.2% in June, and the advance estimate for economic growth in July was essentially unchanged. This implies that the third quarter got off to a weak start.

The Bank of Canada forecasted growth of 1.5% in Q2 and Q3 in its latest Monetary Policy Report released in July. The central bank is now justified in pausing interest rate hikes when it meets again on September 6th. Today’s report is consistent with the recent rise in unemployment. It suggests that excess demand is diminishing, even when accounting for such special dampening factors as the expansive wildfires and the BC port strike.

Some details of Q2 Growth

Housing investment fell 2.1% in Q2, the fifth consecutive quarterly decline, led by a sharp drop in new construction and renovations. No surprise, given the higher borrowing costs and lower demand for mortgage funds, as the BoC raised the overnight rate to 4.75% in Q2. Despite higher mortgage rates, home resale activity rose in Q2, posting the first increase since the last quarter of 2021.

Significantly, the growth in consumer spending slowed appreciably in Q2 and was revised downward in Q1.

Bottom Line

The weakness in today’s data release may be a harbinger of the peak in interest rates. Inflation is still an issue, but the 5% policy rate should be high enough to return inflation to its 2% target in the next year or so. As annual mortgage renewals peak in 2026, the increase in monthly payments will further slow economic activity and break the back of inflation.

The Bank of Canada will be slow to ease monetary policy, cutting rates only gradually–likely beginning in the middle of next year. In the meantime, the central bank will continue to assert its determination to do whatever it takes to achieve sustained disinflationary forces.

Today’s release of the US jobs report for August supports the view that the Canadian overnight rate has peaked at 5%. (The Canadian jobs report is due next Friday). Though the headline number of job gains in the US came in at a higher-than-expected 187,000, the unemployment rate rose to 3.8% as labour force participation picked up, growth in hourly wages was modest, and job gains in June and July were revised downward.

In Canada, 5-year bond yields have fallen to 3.83%, well below their recent peak shown in the chart below.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

CPI Inflation Falls to 2.8% — Inside the BoC’s Target Range

Latest News Kim Stenberg 19 Jul

Canadian Inflation Falls Within Bank of Canada’s Target Range; Food and Shelter Costs Remain High

June inflation data released today by Statistics Canada showed that the Consumer Price Index (CPI) rose 2.8% year-over-year (y/y), slightly below expectations. This was the lowest CPI reading since February 2022.

The decline in inflation was mainly due to lower energy prices, which fell by 21.6% y/y. Without this decline, headline CPI inflation would have been 4.0%. The year-over-year decrease resulted from elevated prices in June 2022 amid higher global demand for crude oil as China, the largest importer of crude oil, eased some COVID-19 public health restrictions. In June 2023, consumers paid 1.9% more at the pump compared with May.

Food and shelter costs remained the two most significant contributors to inflation, rising by 9.1% y/y and 4.8% y/y, respectively. Food prices at stores have risen nearly 20% in the past two years, the most significant rise in over 40 years. Shelter inflation rose slightly from 4.7% y/y in May.

The largest contributors within the food component were meat (+6.9%), bakery products (+12.9%), dairy products (+7.4%) and other food preparations (+10.2%). Fresh fruit prices grew at a faster pace year over year in June (+10.4%) than in May (+5.7%), driven, in part, by a 30.0% month-over-month increase in the price of grapes.

Food purchased from restaurants continued to contribute to the headline CPI increase, albeit at a slower year-over-year pace in June (+6.6%) than in May (+6.8%).

Services inflation cooled to 4.2% y/y from 4.8% y/y in May. This was due to smaller increases in travel tours and cellular services.

The Bank of Canada’s target range for inflation is 1% to 3%. While June’s inflation reading was within the target range, it is still higher than the Bank would like. The Bank raised the overnight policy rate twice in the past two months to reduce the stickier elements of inflation.

There were signs of easing price pressures for consumer goods also. Durable goods inflation continued to cool to 0.8% y/y in June. Passenger vehicle prices rose slower in June (+2.4%) than in May (+3.2%). The year-over-year slowdown resulted from a base-year effect, with a 1.5% month-over-month increase in June 2022 replaced with a more minor 0.6% month-over-month increase in June 2023. This coincided with improved supply chains and inventories compared with a year ago. Household furniture and equipment was up only 0.1% y/y in June, down from a peak of 10.5% last June.

The June inflation data provides some relief to consumers, but it is clear that food and shelter costs remain a major concern. The Bank of Canada will closely monitor inflation in the coming months to see if it is on track to return to its 2% target. There is another CPI report before the Bank meets again on September 6th.

The Bank of Canada’s underlying inflation measures cooled further in May. CPI-trim eased to 3.7%y/y in June from 3.8% y/y in May, and CPI-median registered 3.9% versus 4.0% y/y in May. The chart below shows the closely watched measure of underlying price pressures, the three-month moving average annualized of the core measures of CPI. They continue to be just under 4%.

Canadian inflation continued to make encouraging progress in June. However, the cooling in headline inflation benefits from sizeable base effects due to the favourable comparison to high energy prices last June. The Bank of Canada (BoC) is watching its preferred core measures, which continue to show glacial progress.

Bottom Line

It takes time for the full effect of interest rate hikes to feed into the CPI. Mortgage interest costs will continue to rise as higher interest rates flow gradually through to household mortgage payments with a lag as contracts are renewed.

BoC Governor Macklem emphasized last week that the Bank has become worried about the persistence of underlying inflation pressures in the economy. The June inflation data likely provides some reassurance that things are moving in the right direction, but not fast enough for the Bank of Canada to let its guard down.

The BoC is facing a difficult balancing act. It needs to raise interest rates enough to bring inflation under control, but it also needs to be careful not to raise rates so high that it causes a recession. The next few months will be critical for the BoC as it assesses the risks of inflation and recession.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

June Home Sales in Canada Slowed as Priced Edged Downward

Latest News Kim Stenberg 17 Jul

Bank of Canada June Rate Hike Spooks the Housing Market

 

The Canadian Real Estate Association says the BoC’s surprise rate hike in early June cooled activity following a two-month solid start to the spring housing season. Home sales posted a 1.5% gain between May and June, tepid by recent standards. Sales were up in June in a little over half of all local markets, with increases in British Columbia and Alberta offsetting fewer sales in the Greater Toronto Area (GTA).

On a year-over-year (y/y) basis, the number of transactions in June grew by 4.7%. According to Shaun Cathcart, CREA’s Senior Economist, “History suggests the price side of things will respond to this with only a slight lag. Add to that the recent Bank of Canada rate hikes, and we can probably expect price growth to be moderate in the months ahead, likely still with some degree of upward pressure, but less than in the last three months.”

The CREA cut its forecast for home sales this year as tight inventory, and the rate hikes weigh on the housing market. The CREA now estimates that sales in 2023 will be down 6.8% from a year earlier, a more dramatic slowdown than the 1.1% decline forecast in April.

“With the Bank of Canada unexpectedly ending its pause on rate hikes in June and hiking again in July, a major source of uncertainty has returned to the housing market,” the CREA said.

New Listings

The number of newly listed homes was up 5.9% month-over-month in June. Building on gains of 3.1% in April and 7.6% in May, new listings have gone from a 20-year low in March to closer to (but still below) average heading into the summer.

With new listings outperforming sales in June, the sales-to-new listings ratio eased to 63.6% compared to 66.4% in May and a recent peak of 68.3% in April. The measure remains well above the long-term average of 55.2%.

There were 3.1 months of inventory on a national basis at the end of June 2023, unchanged from the end of May and down more than an entire month from the most recent peak at the end of January. The long-term average for this measure is about five months.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) climbed 2% month-over-month in June 2023—a significant increase for a single month on the heels of similar gains in April and May. It was again very broadly based, with a monthly price increase between May and June observed in most local markets.

The Aggregate Composite MLS® HPI now sits 4.5% below year-ago levels, the smallest decline since November 2022.

 

Bottom Line

Home construction in Calgary, the home to the Canadian energy industry headquarters, is booming, driven by a rush of newcomers from abroad, as well as from more expensive housing markets in the rest of Canada.

Home prices in Calgary have risen 4.2% in a year, the most significant rise among the more than 50 markets the CREA tracks. It’s the only major Canadian city to experience any increase at all. The benchmark price in the city has risen 34% in three years.

Alberta’s population was 4.7 million as of April 1, up 4.5% in 12 months, trailing only tiny Prince Edward Island for the fastest growth among Canada’s provinces. In the first quarter, Alberta had the largest net interprovincial gain — almost 15,800 people — of the country’s provinces and territories. International migration contributed to nearly 36,000 new residents.

Unlike previous surges in Alberta’s population driven by the oil industry’s demand for labour, this boom is happening during a relatively tame period for the province’s most important industry.

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

BANK OF CANADA RATE HIKES RATE BY 25 bps – HIGHEST IN 22 YEARS

Latest News Kim Stenberg 13 Jul

Interest Rates Will Stay Higher for Longer

The Bank of Canada increased the overnight policy rate by 25 basis points this morning to 5.0%, its highest level since March 2001. Never before has a policy action been so widely expected. Still, the Bank’s detailed outlook in the July Monetary Policy Report (MPR) suggests stronger growth and a longer trajectory to reach the 2% inflation target. The Bank of Canada believes the economy is still in excess demand and that growth will continue stronger than expected, supported by tight labour markets, the high level of accumulated household savings, and rapid population growth. “Newcomers to Canada are entering the labour force, easing the labour shortage. But at the same time, they add to consumer spending and demand for housing.”

The Bank forecasts GDP growth to average 1.0% through the middle of next year–a soft landing in the economy. “This means the economy moves into modest excess supply in early 2024, and this should relieve price pressures. CPI inflation is forecast to remain about 3% for the next year, before declining gradually to the 2% target in the middle of 2025.” This is about six months later than the Bank expected in April. This means that high-interest rates remain higher for longer.

While Canadian inflation has fallen quickly, much of the downward momentum has come from lower energy prices and base-year effects as large price increases last year fall out of the year-over-year inflation calculation. We are still seeing large price increases in a wide range of goods and services. Our measures of core inflation—which we use to gauge underlying inflationary pressures—have come down, but not as much as we expected.

There continue to be large price increases in a wide range of goods and services. Measures of core inflation have come down, but by less than expected (see chart below). One measure of core inflation–which removes food, energy and shelter prices, remains elevated and will likely continue to be sticky.

To remove base effects, the Bank looks at three-month rates of core inflation, which have remained at 3.5% to 4.0% since September 2022, almost a percentage point above the Bank’s expectations at the beginning of this year.

In addition, labour markets remain tight. Although the jobless rate has risen to 5.4%, that is still low by historical standards. The unemployment rate was at 5.7% when the pandemic began, which was considered close to full employment at the time. Job gains have been robust, with about 290,000 net new jobs created in the first six months of 2023. Many new entrants to the labour market have been hired quickly, and wage growth has been about 4% to 5%.

The faster-than-expected pickup in housing resales, combined with a lack of supply, has pushed house prices higher than anticipated by the Bank of Canada in January (see chart below). According to the MPR, “the previously unforeseen strength in house prices is likely to persist and boost inflation by as much as 0.3 percentage points by the end of 2023, compared with the January outlook.”

Bottom Line

As always, the next steps by the Bank of Canada will be data-dependent. Interest rates will remain higher for longer if the Bank is correct that inflation will not reach its 2% target until 2025. We also cannot rule out more rate hikes in the future. This morning, the US inflation data for June were released, showing a marked decline from 4% in May to 3% in June. Markets rallied worldwide, taking Canadian bond yields down despite the BoC tightening. The hardship caused by the continued rise in mortgage rates is already evident. OSFI recently announced the possibility of higher capital requirements for federally insured financial institutions on mortgages with loan-to-value ratios above 65% that have unusually high amortizations. This proposal is now out for consultation. It seems OSFI and the federal consumer watchdog are working at cross purposes.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres
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