Fitch affirms Canada’s ratings at ‘AA+’ with stable economic outlook

Global rating giant Fitch affirmed Canada’s Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDR) at ‘AA+’ with a Stable Rating Outlook.

Following the news, the USD/CAD retreated from a monthly high surrounding 1.2975, also probing the five-day uptrend, at 1.2955 by the press time.

Fitch expects firm Canadian economic growth of 3.8% in 2022, decelerating to 2.2% in 2023. “Fitch’s baseline is that BOC will lift the overnight rate another 150bps to 3% by YE2022 and sustain it through YE2023, as it seeks to lower demand and stabilize inflation expectations amid strong price rises,” said the official update.

Key quotes:

The Canadian housing market is slowing after a period of rapidly rising house prices.

In Fitch’s view, the seven largest Canadian banks are adequately capitalized to sustain rapidly increasing credit losses even under an unlikely severely adverse scenario.

The spring FY2022-2023 federal and provincial budgets place Canada’s general government balance on a faster deficit reduction path than Fitch expected at its last review in June 2021.

Federal and provincial governments medium-term budgets together will keep the gross consolidated general government debt/GDP on a downward trajectory, despite increased monetary policy tightening (275 bps) during 2022 in the June baseline scenario.

In February, the governing minority Liberal Party signed a ‘supply and confidence agreement’ with the New Democratic Party (NDP), which assures the mutual policy support for confidence votes, including budget measures during 2022-2025.

Inflation has run thirteen months above the upper threshold of the inflation-control target range driven by supply-chain shocks and strong domestic demand.