Do you remember the scene from Braveheart where William Wallace is yelling “HOLD!!”? The calvary is charging, they have a plan but are waiting for the right moment to unveil their spears. Anyone remember that?
I imagine the Bank of Canada, similar to William Wallace yelling “HOLD” right now. Here’s what I mean …
Here’s a quick economic update for you:
Inflation:
The latest Canadian inflation numbers came is at 2.2%. The Bond market reacted to this new with increasing yields and jump up to a 80% chance the Bank of Canada (BoC) will raise interest rates in May 2018 (up from 67%).
I think the BoC’s position on near term inflationary swings, which give us inflation readings above their target 2% threshold, are viewed with a grain of salt. A sustained inflationary presence, above 2%, would need the BoC to adjust interest rates accordingly.
This quote is from the BoC’s most recent interest rate announcement, “Inflation is fluctuating because of temporary factors related to gasoline, electricity and minimum wages”. HOLD!
Looking out at other leading economic indicators might also have the BoC believe this heightened inflationary pressure might subside …
Gross Domestic Product:
The Bank of Canada’s (BoC’s) most recent interest policy announcement expected a slow down of gross domestic product (GDP) which actualized, coming in at 1.7% for the final months of 2017. Overall, Canada’s GDP for 2017 was 3% primarily fueled from the first six months of the year, with consumer spending as it’s backbone.
The BoC continues to monitor consumer spending, which has decelerated for three consecutive months. Canadian’s might be pulling back on consumer spending and choosing to pay down debt as interests climb? If this continues, I think this would weight on Canada’s future GDP percentages. HOLD!
Wage Growth:
Wage growth, or lack thereof, has also been somewhat puzzling to Canadian Bankers. Wage-common, a new wage growth measurement tool, shows Canada’s wage growth coming in at 2.2% year-over-year. This is up from 1.1% y-o-y from 2016-2017 (for context) but still below the 2.7% average.
As our economy continues to sluggishly grow, more people will be hired, picking up slack from our recent economic downturn. Governor Stephen Poloz also thinks there is a still untapped labour markets in Canada. Should these people enter the workforce we could see non-inflationary growth. HOLD!
Conclusion:
I still think there is upward pressure on interest rates. No doubt. And there are MANY more factors playing a roll in the Bank of Canada’s coming interest rate decisions:
- Unemployment rate in Canada.
- Canadian dollar and exporting profitability.
- NAFTA negotiations and trade (un)certainty.
- U.S Federal Reserve interest rate hikes.
- Three interest rate hikes and a Mortgage qualifying rule change.
It’s a lot on the table. I’d love to hear your thoughts. Email me: chad@canadamortgagedirect.com.
Cheers,
Chad Moore
