Bank of Canada's Rate Hiking Pause
In the previous month, the BoC became the first major global central bank to pause its rate-hiking campaign after raising its benchmark rate to a 15-year high of 4.50%. The bank stated that no further tightening would be required if the economy slows down or experiences a mild recession, as anticipated.
Signs of Accelerating Economy
While inflation has cooled recently, other economic indicators suggest the economy is gaining momentum after a sluggish fourth quarter. Preliminary data revealed that the GDP rose by 0.3% month-over-month in February, following a stronger-than-expected 0.5% gain in January. Employment data for March indicated a seventh consecutive job gain.
Renewed Economic Momentum
James Orlando, a senior TD economics economist, commented on the economy's renewed momentum, with more people working and enjoying increased incomes. He expects this trend to lead to higher economic growth, a sentiment not shared by BoC Governor Tiff Macklem.
Challenges for Bank of Canada Governor
Macklem has faced criticism for reacting too slowly to control inflation, which surged after pandemic restrictions were lifted. The central bank admitted to initially misjudging the price pressures. Macklem's efforts to rebuild public trust could be further complicated by Prime Minister Justin Trudeau's recent budget, which includes billions of dollars in new spending.
Economists' Growth Projections and BoC's Stance
Strong economic figures for February led economists to revise their GDP estimates upward. However, they still predict that the BoC will maintain its current stance. Money markets are betting that the central bank's next move will be a rate cut, as the full impact of higher borrowing costs has not yet materialized, and recent stress in the global banking system has fueled concerns of a credit crunch.
Factors Affecting Canada's Potential Growth
Economists suggest that rapid population growth and easing supply chain disruptions could contribute to Canada's potential growth, last estimated by the BoC at an average of 2.25% over 2023 and 2024. Nathan Janzen, the assistant chief economist at the Royal Bank of Canada, said that despite headwinds from higher borrowing costs and financial stability concerns, BoC has good reasons to maintain a wait-and-see approach.
