Canada's solid growth supports forceful monetary tightening
Summary
- Even with a downside surprise in Q1 GDP, Canada's economy looks to have started 2022 on a solid note. Much of the apparent softness in Q1 stemmed from a large decline in exports. In contrast, gains in consumer and investment spending led to a sturdy increase in final domestic demand.
- The GDP report also showed encouraging details on the consumer front, with gains in both household disposable income and the household saving rate, which should be supportive of economic growth much of this year.
- The solid growth and rapid inflation trends prompted a second straight 50 bps rate hike from the Bank of Canada (BoC) at its June meeting, along with a forceful statement in which the central bank said it is willing to act more forcefully if needed.
- We now expect a more extended series of 50 bps rate increases to be delivered at the July, September and October announcements. We see the BoC's policy rate ending 2022 at 3.25%, and peaking at 3.75% in 2023. Solid growth and aggressive monetary tightening trends suggests the risks are tilted towards more Canadian dollar strength than our existing USD/CAD exchange rate target of CAD1.2500.
Author
Wells Fargo Research Team
Wells Fargo
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