GDP disappoints, but Bank of Canada unlikely to alter rate path

About GDP disappoints, but Bank of Canada unlikely to alter rate path

The Bank of Canada has been increasing the interest rates, which became worrisome at the start of the current year when the economic growth rate decreased. However, since the demand has started increasing once again, the increase in interest rates is likely to continue.

As per the expectations of the Central Bank, the GDP growth has decreased to 3.1% from the 6.6% reported in the last quarter of 2021. While the current inflation in Canada has reduced the country’s imports and exports, it didn’t have much impact on domestic trade. The annual domestic demand has increased by 4.8%, mostly due to household expenditures, business investments, and real estate.

Reports have found that Canada’s economic growth is faster than other countries–namely US and Japan– which were hit by the latest Omicron variant. Despite this, the Bank of Canada has introduced a more tightened monetary policy and has increased the interest rate to 1.5%. These measures are taken to decrease the rate of inflation which reached the height of 6.8% after 31 years.

Canadian citizens, however, are happy because employee compensation has recently increased by 3.8%, and the rate of household savings has increased to 8.1% of the disposable income. The rate of average household spending has also increased by 3.4%, mainly because most households were able to save significantly during the pandemic, which has sustained their purchasing power despite the current inflation.

Unfortunately, the continued spending is also encouraging high inflation, which may cause the Central Bank to increase the interest rates by 0.5% again in July. These swift hikes will become a burden for low-income households struggling with inflation. Although the GDP showed an 18% increase in real estate investment, the tightened monetary policy has decreased sales in housing markets ever since. 

One good news is that the global increase in commodity prices, mainly crude oil and lumber, has given Canada a highly favorable balance of trade.