Will the new GDP numbers force the central bank to raise rates again?

Some economists believe that Canada’s latest GDP results increase the odds of more rate gains from the central bank, although it may prefer waiting for more data before acting again.

According to Statistics Canada, the country’s economy showed an annual growth of 3.1% in the first quarter of 2023, exceeding StatsCan’s forecast of 2.5%.

Preliminary numbers for April showed economic growth of 0.2% following no changes seen in March.

The results show the ongoing resilience in the economy as the Bank of Canada tries to reduce high inflation, and it could make the Bank end the pause in its interest rate tightening cycle earlier than we expected, economists noted.

Derek Burleton, deputy chief economist at TD Bank, says he wouldn’t be surprised if the BoC raised the rate next week, given the strong performance of the second quarter.

“This would change the rate hike odd sometime over the summer even higher than it was earlier,” – he added.

Although a hike at the next week’s meeting isn’t impossible, in Burleton’s opinion, a July rate hike is more likely, as the Bank will have had more data to review on the labour market. Statistics Canada’s next report on the jobs will be released on June 9, two days after the Bank’s meeting.

“They may just want to take a little bit more time to consider all options,” – Burleton said. “I believe July has a higher probability than June.”

According to Stefane Marion, chief economist at National Bank of Canada, increased rate hike expectations were an overreaction to Wednesday’s report and a June or July hike would be too soon.

He points to signs of decreasing business investments and profits, which means the influence of the sharp interest rate increases from the past year is starting to unfold.

The BoC should wait for future reports on inflation and the economy before deciding to act, probably in the fall, he added.

“In my opinion, it would be premature to start raising rates in June just because the first quarter data was stronger than expected,” – Marion noted.

“Probably, the best thing to do now is to stay right in the middle”.