The Canadian economy is weakening but not enough to cut rates. That was the takeaway in a new National Bank of Canada Financial (NBF) report. The bank’s chief rate strategist still sees the country’s economy weakening, but it’s recently provided just enough positive data to convince the Bank of Canada (BoC) hold off on any rate cut discussions.
The Canadian Economy May Have Just Got A Second Wind
Canada’s eroding economic indicators are suddenly bucking expectations. The erosion previously provided data points supporting rate cuts, but have recently provided just enough contrary evidence to muddy the view. This is especially true when it comes to real GDP, employment, and inflation.
Real GDP was taking a downward trip until the most recent quarter, suggesting a recession was arriving. The Q4 release showed growth was a point higher than the BoC’s latest forecast. On a per capita basis, growth is still deeply negative though. An issue NBF believes demonstrates the headline data is only obfuscating the real trend.
“… the report also wasn’t weak enough to warrant the BoC materially shifting its stance or engaging in rate cut discussions,” explained Warren Lovely, chief rates strategist at NBF.
He makes a similar observation in labor markets, with the unemployment rate’s recent bounce. Much of 2023 was about the climbing unemployment rate, indicating the labor market was getting weaker. Only to be bucked by the latest data that pulled the rate lower.
Most importantly, CPI—the true driver of rates, is coming down. Cooling inflation is a big win for the argument that elevated interest rates can give a little. At the same time, the BoC-preferred Core CPI data remains stubbornly high, providing yet another contrarian data point.
“Governor Macklem will likely stress that one good month of inflation data doesn’t make a trend and thus, it’s (still) not yet time to talk about rate cuts,” he says.
Then there’s housing.
Bank of Canada Wants To Avoid Another 2023 Spring Housing Disaster
NBF sees the BoC trying to avoid a repeat of last year when it comes to housing. In January 2023, the central bank told households it was hitting “pause” when it comes to rates. That issue would converge with the U.S. banking mini-crisis a few weeks later, helping to flood the market with cheap mortgage credit at a time when the labor market was still overheated.
“Together with low levels of inventory, prices rocketed higher which contributed to the Bank restarting its hiking cycle in June,” explains Lovely.
Adding, “Surely, policymakers want to avoid a repeat. It’s still early in Canada’s homebuying season but January data indicated activity is picking up again.”
By itself, he doesn’t believe the housing market would be enough to delay any rate cuts. However, when taken as a part of a broader economic picture that is showing signs of resilience, it’s more than enough to expect a delay of rate cut talk.
