Ongoing excess demand in the economy, including a recent rebound in existing home sales, contributed to the Bank of Canada’s decision to hike interest rates earlier this month.
In a summary of minutes from the Bank’s June 7 monetary policy meeting, the six-member Governing Council had debated whether the latest economic data warranted an immediate rate hike or whether it should wait until its July meeting, but signal that a hike was imminent.
In the end, the council decided that enough data had been received and that a “more restrictive policy was needed.”
That data included first-quarter GDP data, which showed growth of 3.1%, above the Bank’s forecast of 2.3%, as well as a rise in consumer confidence and “slowing disinflationary momentum.” The minutes also noted that consumption growth was “surprisingly strong” at 5.8%, with demand being seen in both goods and services.
“Governing Council agreed that the economy remained clearly in excess demand and that the re-balancing of supply and demand was likely to take longer than previously expected,” the summary of deliberations reads.
“More recent data, particularly the increase in housing resales, suggested additional momentum in household sector demand,” it continued. “Growth in the second quarter was therefore viewed as likely to be stronger than forecast in the April MPR.
Resale housing data for May released after the Bank of Canada rate hike confirmed that the Council’s concerns were warranted. Data released by the Canadian Real Estate Association (CREA) last week showed national home sales were up 5.1% in May compared to April, posting a fourth-straight monthly increase. Since reaching a low in January, home sales have rebounded by over 20%.
Home prices, which had already risen for three consecutive months at the time of the Bank’s June 7 rate meeting, posted yet another increase in May, last week’s CREA report revealed. Resale home prices feed into CPI inflation with a one-month lag.
Inflation was another concern
More importantly from the Bank of Canada’s perspective, it noted that headline inflation had ticked up to 4.4% in April from 4.3% in March, despite the Bank’s forecasts that inflation would continue to decline.
While headline inflation has fallen steadily from a high of 8.1% reached last June, it remains stubbornly above the Bank of Canada’s target of 2%.
Governing council had “expressed concern that, while year-over-year core measures of inflation continued to decline, three-month measures of core inflation were not showing a downward trend,” and in fact picked up slightly in April, the minutes read.
Core inflation, meanwhile, which removes volatile items like food and energy, also rose in April for the first time since September 2022, another concern for the Bank.
“The trends in the core inflation data raised doubts about the strength and durability of ongoing disinflation and increased concerns that inflation could become stuck at a level materially above the 2% target,” the Bank said.
The Bank of Canada’s next policy meeting will take place on July 12, with markets currently pricing in 50% odds of another quarter-point rate hike.
