Canada: Mixed signals – TD Economics

Those trying to time the next Bank of Canada move received mixed signals from Canada’s economic releases in the past week, according to Diana Petramala, Economist at TD Economics.

Key Quotes

“Retail sales in April started the second quarter off on a strong note, suggesting the continuation of strong economic momentum. But, then Friday’s weaker-than-anticipated consumer price report showed that inflation continued to decelerate into May. Most of the Bank of Canada’s preferred measures of inflation eased for a fifth straight month, and are well below the Bank’s 2% target. While the soft inflation report helped curb enthusiasm over the possibility of a July rate hike, there are still grounds to believe the Bank of Canada will begin raising interest rates in October.”

“Looking forward, a healthy pace of consumer spending is likely to continue to underpin robust economic momentum. While housing related items were at the top of household shopping lists, consumers have been spending on just about everything at a healthy rate – a trend that will likely continue through most of 2017. Households are still carrying a lot of debt, but the low interest rate environment has kept the carrying costs of that debt low, giving them some financial wiggle room to continue to support retail spending. Meanwhile, the strength in housing activity through the last quarter of 2016 and into early 2017 is likely to continue to boost spending on house-related items as those buyers renovate and furnish their homes. The slowdown in housing activity currently underway will likely not feed into a slower pace of retail spending until the end of this year and early next year.”

“Overall, the low inflation backdrop is likely to keep the Bank of Canada on hold through July’s rate announcement, but given that monetary policy acts with a long and variable lead, improving economic conditions are likely to give the central Bank motivation to start gradually raising rates in October of this year.”