0.25% Increase & Eitan’s Economic Summary

Today, the BoC increased rates +0.25% due to (1) higher-than-expected growth in Canada’s economy, and (2) to monetary policy that is not yet restrictive enough to bring inflation down.
(Rates have increased to where we were in 2007).

Here are some highlights from today’s announcement:

– Inflation ticked up in April (May not out yet) and there are concerns inflation could get stuck above 2% (means higher rates for a while).

– Canada’s economy was stronger than expected (GDP up 3.1%) … 
As an aside, soft landing?! We’re full steam ahead…

– Consumption growth is strong and broad. People are still buying goods. Services demand is also strong.
I’ve personally asked many people if they have changed their spending habits. The majority of responses are: “not really,” and “no.” More spending means a strong economy.

– Spending on “interest-sensitive goods” (housing, debt) increased 
This point goes against what was expected due to higher rates. See below for FOMO in the housing market… 

– Labour market is tight: higher immigration and participation rates (people in the workforce) are expanding the workforce. But many are quickly hired and there’s still strong demand for labour.

– Globally, consumer price inflation is coming down due to energy prices but underlying inflation is still high.

– Many major central banks are signaling interest rates may have to rise further to restore price stability.

– Financial conditions have tightened back to those seen before the bank failures (March 2023) in the US and Switzerland.

Key Takeaway:
The BoC said that based on the “accumulation of evidence,” it decided to increase its policy rate, “reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.” 

Basically, if inflation doesn’t decrease, and our demand continues to be strong, expect more rate increases this year.

The BoC is ONLY focused on inflation. They will do whatever they can, no matter the consequences, to reduce inflation to the 2% target rate.