When the Bank of Canada (BoC) governor woke up this morning, there's a good chance he was disappointed when he set his eyes on the most recent round of Canadian economic data.
“There is no denying that the narrative on the BoC policy outlook suffered an unexpected setback with this morning’s data,” said Derek Holt, vice-president and head of capital markets economics at Scotiabank, in a note to investors.
Year over year, inflation in May was 2.2%, 0.4 percentage points lower than the expected 2.6%
Canadian retail sales unexpectedly declined sharply in April by 1.2%. This was significantly below Scotiabank’s projection of a 0.1% increase. The main driver of the fall in retail sales was a 4.3% decline in motor vehicle sales. Retail declines were spread across six provinces, concentrated mostly in Ontario and Quebec.
Despite the disappointing numbers, Holt highlights that he would avoid claims that the central bank is considering changes to its plans to raise interest rates later this year.
“A July hike is still very possible, although likely a somewhat dovish sounding hike,” said Holt.
Based on the available data, Nathan Janzen, senior economist at RBC, told investors that overall economic output won’t change by much in April. Despite what will likely be disappointing April GDP growth numbers, strong growth in February and March means that April’s projected stagnate GDP numbers alone likely won’t concern the BoC.
While economic output in itself may not concern the central bank, the combination of that along with softening inflation numbers and increased trade tensions are not that encouraging, according to Janzen.
Janzen says this makes the BoC’s decisions to raise rates a close call compared to what had been previously thought.
While July’s bank hike may be in doubt, Dawn Desjardins, RBC’s deputy chief economist, says that the data along with growing trade and investment uncertainty means that future rate hikes will be slower to materialize.