Dismal economic data set to cool Bank of Canada’s hawkish tone

John Shmuel

Disappointing economic data on two fronts Friday will likely cool hawkish language from the Bank of Canada when it makes its interest rate announcement next Tuesday.

While it is widely expected that the Bank will keep its benchmark interest rate at 1%, speculation has grown this year that a rate hike could come as soon as this summer,mainly due to improving job growth and home building in Canada. But clear signs emerged Friday that the global economic slowdown could effect Canada more than expected.

New data showed that the Canadian economy grew by only 1.9% in the first quarter, well below the Bank of Canada’s target of 2.5%. GDP in March in particular increased by just 0.1%.

“The soft handoff from March means that the second quarter won’t be stellar either,” said Krishen Rangasamy senior economist at National Bank.

Meanwhile, dismal data from the U.S. suggests the country’s job growth is stalling. Employers created a paltry 69,000 jobs in May, the fewest in 12 months. Economists had been expecting jobs to increase by 150,000. The miss, combined with new entrants into the workforce, was enough to push unemployment to 8.2% from 8.1%.

“Europe’s storm clouds have nearly put the brakes on U.S. business hiring, casting a pall over the economic outlook,” said Sal Guatieri, senior economist at BMO Capital Markets.

In its latest interest rate announcement in April, the Bank of Canada surprised markets with strong language hinting it would move to hike interest rates this year. Citing reduced slack in the economy and firmer underlying inflation, the Bank said that “some modest withdrawal” of “monetary policy stimulus”  would be needed.

Some economists had even said a rate hike this summer was possible. But those expectations are being tempered as economists now say the Bank will likely scale back its hawkish language on interest rates.

“Expect the Bank of Canada’s recent hawkish talk to tone down quite significantly in light of softer domestic numbers and also due to external factors,” Mr. Rangasamy said.

Derek Holt, economist at Scotia Capital, said the data reinforces his view that the Bank of Canada will be on hold until at least mid-2013.

“The policy implication here is that, in our judgment, there is no way the Bank of Canada will be hiking rates this year and likely not until well into next year at the earliest,” said Mr. Holt.