Unknowns cloud interest rate future
OTTAWA — A pair of unexpectedly soft economic reports are creating fresh doubts about the timing of the Bank of Canada’s next interest rate hike.
For months, experts have been predicting Bank of Canada governor Stephen Poloz will raise his benchmark rate at next month’s meeting. But broadening economic unknowns — mostly linked to trade concerns around U.S. President Donald Trump’s protectionist agenda — have begun to lead some analysts to wonder if Poloz will stand pat on July 11.
And on Friday, two reports from Statistics Canada added more uncertainty to the interest rate outlook.
One release by the agency found Canada’s annual inflation rose at a pace of 2.2 per cent in May for the second straight month. The number, however, was cooler than market expectations of 2.6 per cent.
In the second report, Statistics Canada found that retail sales contracted in April by 1.2 per cent for the reading’s first month-to-month decline since December.
“These reports kind of highlight an economy that has slowed pretty significantly from the last year or two,” Robert Kavcic, senior economist for BMO Capital Markets, said in an interview.
“Given a lot of the uncertainty out there, and a little bit of a softer tone to this data, I think expectations for a July rate hike have probably come down a little bit,” he said.
Royce Mendes of CIBC Capital Markets wrote in a report that Friday’s “bad data” make it even more difficult for the Bank of Canada to hike rates in July. Mendes noted, however, that things could improve before Poloz’s July 11 meeting because more important numbers on gross domestic product and employment are still to come.
Nathan Janzen, RBC senior economist, said the combination of Friday’s figures, somewhat slower economic growth and a deteriorating tone in trade discussions with the U.S. “aren’t all that encouraging” and will make the Bank of Canada’s rate decision closer than previously thought.
The May annual inflation number in Friday’s report followed the 2.2 per cent reading for April and 2.3 per cent for March.
The main contributors to inflation last month were led by gasoline prices. Compared to a year earlier, they climbed 22.9 per cent in May and helped drive overall energy prices for the month 11.6 per cent higher.
Inflation also received a lift because Canadians paid more last month for restaurants, airline tickets and mortgage interest costs.
Consumers, however, paid less in May for telephone services, natural gas and digital devices and computers.