First National Financial LP

Residential Market Commentary - New interest rate outlook

  • First National Financial LP

The latest reading on Canada’s economy has triggered a quick turnaround in expectations about the Bank of Canada’s course on interest rates.

The latest reading by Statistics Canada shows economic growth slowed markedly in the second quarter.  Gross Domestic Product – which is the total value of all goods and services produced in the economy – contracted by 0.2% in the April to June period.  Forecasters had been calling for a 1.2% increase.  The Bank of Canada had been projecting a 1.5% increase.

StatsCan also downgraded its Q1 growth rate from 3.1% to 2.6%.  Early estimates for July show the month coming in flat.

The report adds to the evidence that the Bank of Canada’s high interest rate policy is having its intended effect.  StatsCan’s latest, monthly jobs report showed the unemployment rate increased to 5.5% in July.

Two key factors led the decline in GDP.  Household spending, which has been a prime target of the interest rate policy, grew by just 0.1% compared with a 2.5% increase in the first quarter.

Housing also saw significant declines.  Investment was down 2.1% quarter-over-quarter.  New construction fell 8.2%.

Most market watchers now believe the Bank of Canada will step to the sidelines for the rest of the year.  Just last month, many analysts were calling for one more quarter-point increase before the end of 2023.  The Bank’s current policy rate is 5.0%.