Economists are predicting that the Bank of Canada will halt its interest rate hikes this week due to signs of a cooling economy, following a contraction in the country's gross domestic product (GDP) in the second quarter of 2023. The GDP shrank at a 0.2 per cent annualized pace, according to the latest figures from Statistics Canada, indicating the onset of an economic slowdown.
This prediction was further solidified by weaker-than-expected GDP data last week, which led many economists to anticipate a hold on rates at the upcoming monetary policy meeting. Despite this, not all analysts believe that this marks the end of the current rate-hike cycle.
Douglas Porter, BMO (TSX:BMO) chief economist, indicated in a note to clients that due to the rise in unemployment, slowing GDP, and some cooling in core inflation, it appears that rate hikes might be over. However, others like Derek Holt from Scotiabank (TSX:BNS) are not entirely convinced. Holt suggested that another rate hike could be delivered despite recent GDP figures, but any further assessment would likely be deferred until the October meeting.
The country's inflation rate stood at 3.3 per cent as of July 2023, higher than the central bank's target of two per cent. Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO Capital Markets, stated that while he anticipates the Bank of Canada to hold rates until 2024, he expects the bank to keep options open for further rate hikes if signs of growth emerge while inflation remains high.
Royce Mendes, managing director and head of macro strategy at Desjardins, expressed similar sentiments. He warned that more economic challenges lie ahead as many Canadians have yet to renew their mortgages in this higher interest rate environment. This situation, combined with the aggressive rate hike cycle carried out by the bank in recent months, is predicted to slow down the economy even further.
Despite these concerns, economists remain divided on future rate hikes. Some believe that there has been enough weakness in the economy to warrant a pause on Wednesday's decision even with uncomfortable inflation data. Others suggest that market conditions have eased recently and caution against driving further easing that could trigger a rally in 5-year Government of Canada bonds similar to earlier this year.
As Canada enters a stage of below-trend economic growth due to high interest rates impacting demand, economists will closely watch the Bank of Canada's next move on Wednesday.
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