Q4 Faster GDP Growth Ensures BoC’s Interest Rate Hike

Canadians took advantage of elevated savings and low interest rates to buy houses in 2021.

The Canadian economy grew at an annual rate of 6.7 per cent in the fourth quarter, much faster than the Bank of Canada was expecting, guaranteeing an interest-rate increase when policymakers announce the results of their latest policy deliberations Wednesday.

The war in Eastern Europe has upended the near-term outlook, which was dominated entirely by inflation until the middle of last week, when Russian President Putin stunned the world by sending troops into Ukraine.

Inflation remains too high for the Bank of Canada to ignore, especially with evidence of strong demand. Business investment, fees related to home sales, and stockpiling by companies led the surge in economic growth in the fourth quarter.

The latter could help offset inflation pressures, as it suggests companies were either learning how to deal with all the supply disruptions that came with the pandemic, or had decided to build their inventories in anticipation of new ones.

A separate Statistics Canada report showed that GDP, based on output by industries, was little changed in December, suggesting the economy held up in the face of the Omicron wave of COVID-19 infections.

Statistics Canada said preliminary information suggests GDP increased 0.2 per cent in January.

The Bank of Canada in January predicted Canada’s gross domestic product would grow at an annual rate of 5.8 per cent in the fourth quarter, a strong enough estimate for the central bank to conclude that the time had come to end its promise to keep the benchmark interest rate near zero until at least the spring of 2022.

Canada’s economy ended 2021 with considerable momentum, as the fourth-quarter acceleration followed growth at an annual rate of 5.5 per cent in the third quarter, which was also much faster than the country’s economy typically expands.

The Bank of Canada is expected to start a series of interest rate hikes this week to wrestle inflation down from a three-decade high.

All 27 economists surveyed by Bloomberg News anticipate Governor Tiff Macklem will raise the benchmark interest rate by a quarter percentage point to 0.5% at a policy decision Wednesday.

The Bank of Canada is also seen unveiling part of its plan to shrink holdings of government bonds acquired over the past two years.