BRITISH COLUMBIA – A stronger than expected first quarter of 2023 prompted the Bank of Canada to hike their interest rate by 25 basis points to 4.75 percent, meaning mortgage lenders will likely follow to bring 5-year fixed mortgage rates back above 5.5 per cent, a British Columbia Real Estate Association (BCREAS) document states.
Prior to the surprising increase in early June, the BCREA noted that the Canadian GDP outpaced expectations in the first quarter, expanding 3.1 per cent on an annualized basis, as the economy remained robust in many areas. A burst of economic growth at the start of the year supported a high first quarter growth rate, but April’s preliminary GDP estimate shows growth continuing into the second quarter.
Housing markets, which swooned in the immediate aftermath of rate hikes, has shown solid signs of recovery in recent months.
“After signaling a pause in its monetary tightening just a few months ago, the Bank of Canada has already changed course, the BCREA release notes. “While inflation has come down significantly, core inflation has been stubbornly trending around 4 per cent, and with home prices already recovering across the country, inflationary pressures are rising.
“In the Bank’s estimation, interest rates will need to move higher to slow the economy and bring inflation back to its 2 per cent target.”
The report states the Bank continues to expect CPI inflation to ease to 3 per cent by summer, however, monthly inflation continues to trend about two times higher than its 2 per cent target, a circumstance the Bank fears could become persistent without immediate action. Core inflation has been stubbornly trending around 4 per cent, and with home prices already recovering across the country, inflationary pressures are rising.
“In the Bank’s estimation, interest rates will need to move higher to slow the economy and bring inflation back to its 2 per cent target. The Bank will likely raise its overnight rate at least once more to 5 per cent. Those expectations are already being priced into 5-year Canadian bond yields, which rose to their highest level since October 2022 following the rate decision.”
Canada’s real Gross Domestic Product (GDP) was flat in March, although it grew 0.8 per cent in the first quarter of 2023, following roughly zero growth in the previous quarter. Almost all of this growth was concentrated in the month of January. Goods-producing sectors rose 0.1 per cent while services-producing sectors rose 0.9 per cent.
The public sector (educational services, health care and social assistance, and public administration) was the largest contributor to growth for the third consecutive quarter.
Exports rose 2.4 per cent in the first quarter, while imports rose just 0.2 per cent, spurring growth. Higher household spending on goods (1.5 per cent) and services (1.3 per cent) also pushed GDP upwards. Higher borrowing costs, meanwhile, caused housing investment to fall 3.9 per cent in the first quarter, with new construction (-6.0 per cent), renovations (-2.1 per cent), and ownership transfer costs (-1.5 per cent) all declining.
Compensation of employees rose 1.7 per cent from the prior quarter, but disposable income fell 1 per cent largely as a result of lower government transfers compared to last quarter. At 5 per cent, the Canadian unemployment rate remains near record lows. Meanwhile, inflation remains hot, with the year-over-year rate increasing to 4.4 per cent in April from 4.3 per cent in March. These indicators will put some pressure on the central bank to potentially change course following its ‘conditional pause’ on further rate hikes as of January.
Business Examiner Staff
