The Canadian economy is booming and inflation remains lofty, according to the central bank. The Bank of Canada (BoC) held its key policy rate this morning, matching market expectations. The BoC defended its decision based on strong GDP growth and elevated inflation. However, the Governor warned that high energy prices and trade turmoil may trickle into input costs, suggesting the potential for higher rates if price growth doesn’t calm.
Bank of Canada Holds Rates Due To High GDP Growth & Inflation
The BoC held the overnight rate at 2.25%, where it’s been for just over ten months. The Bank Rate (2.5%) and deposit rate (2.2%) also remain unchanged, as widely expected. The central bank defended the decision on the basis that economic data and inflation are moving in line with expectations.
“Since our last decision, inflation and growth in Canada have evolved broadly as forecast. Against that background, we decided to leave the policy rate unchanged,” explained BoC Governor Tiff Macklem, in his opening remarks.
The Governor stressed the BoC’s Governing Council remains prepared to react to economic conditions as they evolve. He further emphasized their commitment to anchor price stability (i.e. inflation). The messaging was clearly steered towards managing expectations of excess growth and global shocks, not fear of economic headwinds.
GDP & Sticky CPI Can Mean Higher Rates If They Don’t Cool Soon
The BoC dumped a bucket of cold water on the idea of lower rates in the near-term. Citing broad-based gains in consumption, they note that second-quarter GDP outperformed expectations with 3.3% annual growth. While the Governor mentioned a sharp increase in exports, business investment, and a “rebound” in housing activity, he failed to elaborate. The latter being an odd one, since housing activity has weakened in contrast to last year.
The real reason is the BoC’s one-and-only mandate—controlling inflation. CPI is currently hovering at 3%, but it was largely dismissed as related to the global energy shock. While the central bank can afford to temporarily gloss over it, higher energy prices tend to spill over into the broader market, as it’s a precursor to pretty much everything.
Trade and Tariffs Threaten To Derail “Recovery”
The one area the BoC sees risk is around trade, given the fresh round of tariffs. The breakdown of Canada-US trade talks resulted in the US targeting roughly 5% of Canadian exports. As a result, Canada will be reciprocating with fresh tariffs on imports from the US. The resulting uncertainty is expected to delay capital investment and hiring, and potentially boost input costs.
“… uncertainty is high and new US tariffs and threats of further action pose risks to the sustainability of the recovery,” notes the BoC’s press release.
Um, a recovery? A steady stream of upward revisions from StatCan eliminated negative growth and the “technical recession.” Typically a recovery involves a downturn, and if the downturn was an error in measurement, it technically didn’t exist.
Despite the framing of a strong economy, the central bank did note that recent growth may reflect “temporary factors.” They also warn of excess supply, suggesting consumption isn’t quite as healthy as the data currently shows. Though if recent data points serve as a reference, the slack is just a revision away from being an economy in perfect harmony.
