For the past decade, Canadian month-over-month GOP, Inflation, and BoC Key Rate have traveled a similar path and not wandered too far from each other. However, you can see that since the pandemic, the gap between Canada’s economic output and inflation has diverged significantly.
We’ve become used to a hotter economy leading to higher inflation, which then prods the Bank of Canada to raise its Key Rate. Higher interest rates are seen to cool the economy .. sometimes into a recession. Then rates dip and the cycle begins again. Fast forward to now … global events and inflationary factors beyond the control of Central Banks around the globe are presenting economic signals without precedence.
Canadian unemployment stats continue to trend low, and economic output is steady. The Bank of Canada is forecasting that global economic growth will slow to about 3.5% this year and 2% in 2023 before gaining to 3% in 2024. In comparison. the BoC’s latest forecast is for Canada’s economy to grow by 3.5% in 2022, 1.75% in 2023, and 2.5% in 2024. Our world-lagging growth outlook is likely based on the U.S. economy cooling – our largest trading partner.
Prices at the gas pump and grocery store continue to dominate headlines as consumers face the highest inflation in 31 years. If economic growth tempers as forecast and global events moderate, economists currently predict that Central banks, including the BoC will ease monetary policy and we could see rates trending to a more comfortable level by the end of next year.