How will the new GDP report affect the central bank’s next rate decision?

Sal Guatieri, director and senior economist at BMO Capital Markets, believes that recent reports pointing to strong economic growth in the third quarter will probably lead to further interest rate increases by the Bank of Canada.

In his opinion, the Statistics Canada’s new data showing “resilience” in the national economy, with a strong labour market, wage growth and stable spending will hardly be enough to restrain the sky-rocketing inflation without further rate hikes.

“The numbers may only encourage the BoC to keep raising its overnight rate,” – Guatieri noted.

“It is telling the central bank that more measures need to be taken.”

Two reports from the federal agency looked at economic growth in September and Q3. They show that the national economy’s annual growth reached 2.9% in the third quarter.

Real domestic product growth exceeded forecasts at 0.7%, with the largest hikes seen in exports, non-residential structures and business investment. Meanwhile, the real estate market and household spending saw moderate drops.

The reports were released a week before the BoC’s last rate decision in 2022. Today, its key lending rate is 3.75%.

According to Guatieri, we’ll probably see a smaller increase of 0.50% this time.

He believes spending trends mentioned in the latest Statistics Canada reports may reflect excess savings people have piled up during the pandemic. However, he still expects an economic slowdown in the current quarter and a very soft and shallow recession in Canada and the U.S. as homeowners react to rate increases by reducing their spending.

The strong export trend will hardly continue, Guatieri says, as the world is dealing with the similar economic pressures as Canada. “We don’t think this kind of growth will last long,” – he added.