Stubborn inflation may not necessitate another interest rate hike, but it could result in the Bank of Canada maintaining its policy rate at a higher level for a longer duration, as indicated by new forecasts released this week.
An updated economic outlook from Deloitte Canada, published on Thursday, reveals a more challenging path for gross domestic product (GDP) compared to initial expectations. GDP serves as the benchmark for Canada’s economic output.
“Over the near term, we anticipate continued economic struggles in the face of high household debt, soaring interest payments, and persistently stubborn inflation,” states the report.
Last month, many economists were taken aback by the news that Canada’s economy experienced a slight contraction in Q2 of this year. Deloitte predicts further GDP decline for the remaining quarters of 2023, followed by a return to modest growth starting in 2024.
Overall, the firm has revised its forecast and now expects real GDP growth of 1.0% in 2023 and 0.9% in 2024, down from earlier projections of 1.3% and 1.0% respectively, as stated in the June forecast.
Deloitte notes that the anticipated economic slowdown, linked to the tightening cycle of the Bank of Canada’s interest rates, is finally materializing.
The report points out that the slowdown was delayed due to households utilizing their pandemic-era savings and some homeowners shifting their mortgages into negative amortizations. However, these impacts may have reached their limits and are now leading to a slower fall and winter period.
Deloitte also predicts that population growth resulting from high immigration rates in Canada will outpace job gains, leading to an unemployment rate of 5.9% in early 2024, up from the reported figure of 5.5% in August.
With the economic cooldown finally taking effect, Deloitte expects that the Bank of Canada will have completed its rate-hike cycle aimed at bringing annual inflation back to the central bank’s 2% target.
Inflation’s Uptick: An Obstacle in the Bank of Canada’s Interest Rate Strategy
However, the path towards achieving the target inflation rate has not been straightforward.
The inflation rate has risen for two consecutive months, reaching 4.0% in August after hitting recent lows of 2.8% in June. Statistics Canada attributed this increase to higher gas prices and rising shelter costs, including mortgage payments.
While Deloitte views this inflationary spike as temporary, it does acknowledge the acceleration of core inflation metrics as a potential concern for the Bank of Canada.
A revised rate forecast released by the Bank of Montreal this week also highlights the central bank’s challenging position, with an uptick in inflation in the near term and expectations of further economic slowdown as a result of previous rate hikes.
BMO suggests that the Bank of Canada will closely monitor the upcoming inflation and jobs reports in September before making its rate decision on October 25, as it carefully balances its monetary policy to avoid both overtightening and undertightening.
“While another rate hike is still possible, it is more likely that rates will remain unchanged… for a longer period,” indicates BMO’s rate forecast.
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