Rosy economic data, central bank survey back expectations of interest rate hike


Sturdy economic growth and a central bank survey showing renewed business optimism reinforced expectations that Canada’s first interest rate hike since 2010 could be less than two weeks away.

A Statistics Canada report Friday showed the economy posted yet another month of solid growth in April, building on the surprisingly strong first quarter.

The Bank of Canada survey found that business sentiment had climbed to its highest level since 2011. The forward-looking poll said corporate expectations in key areas like future sales, investment and hiring intentions all rose above historical averages.

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Combined, the results provided further evidence the economy is building momentum.

This, along with increasingly “hawkish” comments from senior Bank of Canada officials, has led many analysts to predict the bank will start raising its trend-setting rate at its next scheduled announcement on July 12.

“Arguably, it’s a done deal,” Randall Bartlett, chief economist for a University of Ottawa think tank, said when asked how the latest figures affected rate-hike expectations.

“Given how clearly they’ve telegraphed this in speeches, in interviews and the positive economic data that we had today … I think it would be unlikely for them to keep rates on hold at the July meeting.”

The Bank of Canada’s main policy rate rate sits at the low level of 0.5 per cent. An increase will likely prompt big banks to raise their prime rates, a move that would drive up the costs of variable-rate mortgages and other borrowing tied to the benchmark rate.

The country’s growth – as measured by gross domestic product – expanded by 0.2 per cent in April, according to Statistics Canada. The increase matched the expectations of economists and signalled a healthy hand off to the second quarter.

Growth in service-producing industries for April increased by 0.3 per cent, while on balance goods-producing industries remained essentially unchanged.

On business sentiment, the Bank of Canada survey found that since April its measure for hiring intentions over the coming 12 months had accelerated to the highest level on record.

The survey also showed Canadian firms expected sales growth to continue improving over the coming year, while business investment intentions for that period also remained elevated.

Along with key economic indicators – and inflation figures, in particular – the Bank of Canada keeps a close eye on its measure for business sentiment when making rate decisions.

Increased borrowing costs would have far-reaching implications for average Canadians, rate-sensitive industries and the broader economy.

Bartlett’s think tank, the Institute of Fiscal Studies and Democracy, released new research Friday that showed that higher rates would have multibillion-dollar impacts on the Canadian government’s books.

The study predicted the stronger-than-expected growth outlook will reduce the federal government’s annual deficits by between $2.8 billion and $10.1 billion in each of the next four years, compared to the projections in the federal government’s March budget.

However, over the longer term, the analysis said the effects of higher debt charges triggered by sooner-than-expected rate hikes would increase the annual shortfalls by $2.9 billion in 2020-21 and by almost $9.3 billion in 2021-22.

“We’re expecting to see that debt charges are going to rise much more rapidly than we had expected back in March,” Bartlett said.

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