Slowing economy points to the efficiency of Bank of Canada rate increases

Economist Pedro Antunes says that the flat Canadian economy at the end of the last year is a good sign that monetary policy is working to restrain inflation.

According to Statistics Canada report, real gross domestic product (GDP) remained unchanged in the fourth quarter of 2022, following five quarters of gains.

In December, the economy was down by 0.1%, and the report says it showed a much gloomier economy than expected as higher growing interest rates hit the economy harder than economists predicted.

In Antunes’ opinion, it’s “good news” to see no increases in the GDP.

“It means that, hopefully, monetary policy will keep restraining the economic activity so that we can reduce the inflation numbers,” – he said.

With strong employment numbers recently, Antunes expects markets to react favourably to the GDP results.

“The fact that total economic activity remains almost unchanged, even despite strong employment, I believe will be a success story for markets.”

The numbers were released almost a year after the central bank started its tightening cycle to fight the record-high inflation, increasing its key lending rate to 4.50%. In January, the BoC announced its plans to pause as its monetary policy shows a deeper effect on the national economy.

Antunes says it takes time for rate increases to affect the broader economy, with some influences already seen in the cooling real estate market. Recent inflation numbers are “moving in the right direction,” he believes, which will probably affect the Bank’s decision to pause its tightening cycle.