First National Financial LP®

Residential Market Commentary - GDP and interest rate predictions

  • First National Financial LP

One of the closely watched components in the Bank of Canada’s interest rate setting process missed growth expectations, but was still up on a month-over-month basis. 

The country’s Gross Domestic Product rose by 0.3% in May, less than the 0.4% that had been forecast, but up from 0.1% in April.  (April’s growth rate was revised upward from flat.)

Initial estimates for June suggest GDP, which is the total value of all goods and services produced by the economy, will actually shrink by 0.2%.  If that happens economic growth for the second quarter will come in at around 1.2%, down from 3.4% in the first quarter.  It would also be below the Bank of Canada’s 1.5% forecast.

Those numbers appear to be what the central bank has been trying to achieve with its inflation-fighting interest rate policy.  Several prominent economists are now predicting that the Bank will not be raising its trend-setting Policy Rate at its next setting in September.

There is not a consensus on that forecast though.  A number of market watchers point to transitory shocks that have temporarily slowed the economy in recent months including: the federal public service strike, the B.C. ports strike and the wildfires across the country.

Many of them also point out that the labour market remains tight and wage gains are running in the 4.0% - 5.0% range.  As well, core inflation remains stubbornly sticky, holding in the 3.5% area.

The Bank of Canada rate currently stands at 5.0%.  The next rate announcement is set for September 6th.