Early Christmas for economy might mean earlier rate hike

Canadian economic bulls got some early Christmas presents last week, and that’s boosted — albeit only slightly — the odds of an interest rate hike in January.

While October’s GDP report served up a lump of coal, coming in below expectations, two other data points paint a much brighter picture. Wholesale trade figures for October climbed by 1.5 per cent, and retail sales matched that gain, with improvements coming from all provinces.

“The two reports suggest that consumers were out in full force ahead of the most important weeks for retailers,” said Michael Dolega, senior economist at TD Bank.

However, the strong showing for the consumer in the fourth quarter comes at a time when overall economic growth appears less robust.

Dolega noted that much of the weakness in October was a related to one-off factors, including maintenance-related shutdowns in the oil and auto sectors, and a warm start to the heating season.

As a result, the economist expects above-potential Canadian economic growth to continue supporting inflation. Consumer prices climbed a healthy 0.5 per cent in November, bringing inflation up to 2.1 per cent from 1.4 per cent in October.

The rebound in energy prices helped, but almost all major categories experienced higher inflationary pressures.

Dolega believes this recent round of economic figures provides support for an earlier rate hike from the data-dependent Bank of Canada.

“It paints a picture of an economy that’s outperforming its potential growth rate, helping reduce whatever slack remains,” the economist said. “But, while the chances of a rate hike in January have certainly increased, we remain of the view that a move in March is the more likely scenario.”

Nick Exarhos, an economist at CIBC World Markets, noted that a better GDP reading would have convinced him to potentially move forward his call for an April rate hike. However, the flat reading for October has him forecasting Q4 growth below the 2.5 per cent outlook from BoC governor Stephen Poloz. “That suggests no reason for urgency, with markets now having to undo recent moves that bid up the Canadian dollar ...”

BMO Capital Markets chief economist Douglas Porter trimmed his fourth quarter GDP forecast to 2.0 per cent from 2.5 per cent previously. He noted that the somewhat softer growth backdrop keeps BMO “semi-comfortable” with its call for the next rate hike in March.