Canada’s Economy Is Supporting Higher Rates, No Cuts In 2023: BMO

What recession? Canada’s economy continues to grow against the forecasts of experts. In a research note to investors, BMO explained they’re making an upward revision to its Canadian gross domestic product (GDP) forecast. Despite climbing interest rates, the economy continues to outperform. That has the bank warning that higher rates will stick around longer than many anticipate. 

Canada’s Economy Is Doing Better Than Expected, Despite Higher Rates

Canada’s economy is doing much better than expected, despite sky-high interest rates. As a result, BMO revised its GDP growth estimates, raising their forecast from 0.8% to 1.5% for the 2nd quarter. It would bring their annual growth expectations to 1.5%, slightly higher than previously anticipated. This is far from an economy showing stress due to interest rates—expectations are rising alongside rates. 

Bank of Canada To Hike In July, But The Terminal Rate Is Here

BMO doesn’t see the revised expectations as enough to change the current trajectory. The Bank of Canada (BoC) will make its next rate decision on July 12th, and another hike is still expected. It’s seen as the last increase needed, but the data would have to show moderating  activity. 

“Early readings next week on home and auto sales for June will help inform the Bank on how the consumer is holding up. We have penciled in a final 25 bp hike, but it will likely come down to next week’s June employment report,” explained Douglas Porter, chief economist at BMO. 

Porter’s bank is forecasting just one more hike now. They see these rates sticking around for a while afterwards. 

Canada’s Economy Is Too Strong For Interest Rate Cuts

Looking forward to rate cuts by the end of the year? You might be disappointed, because few experts are entertaining that possibility at this point. 

“Even if the Bank chooses not to hike further in July, the larger picture is that the risk remains for higher rates, for longer, and rate cuts are a 2024 story,” said Porter. 

Adding, “For a final thought on that theme, we have long been of the view that central banks would begin trimming rates in early 2024 amid calmer inflation-we’re not changing that call, yet, but the risks are clearly tilting to a later start for rate cuts amid the resilient economic backdrop.” 

It might sound like bad news to some, but it’s actually great news. Rate cuts are for economies that need stimulus to drive growth, attempting to let consumers borrow future income to stimulate consumption today. 

Canada’s economy has managed to grow at a brisk pace, even as interest rates climbed to a generational high. Credit growth is tapering, but the economy continues to show growth more in line with real income. 

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