Strong Canadian real GDP report and very upbeat Business Outlook Survey: BoC to hike on July 12th

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Strong Canadian real GDP report and very upbeat Business Outlook Survey: BoC to hike on July 12th
Barring any major economic disaster during the next
week and a half, we are now expecting the BoC to lift
its policy rate by 25 basis points on July 12th. Even
though CPI has been moving away from the central
bank's 2% inflation target, the two reports released
this morning are unambiguously supporting an
imminent hike.
Firstly, real GDP advanced at a robust pace for a sixth
consecutive month in April (+0.2% m/m), bringing the
year-over-year pace of economic expansion to a 3-
year high (+3.3%, see chart). Besides a 0.9% m/m
contraction in both residential construction activity and
manufacturing output, most subsectors of our
economy gained further momentum during the month.
Secondly, the summer edition of the Business Outlook Survey released at 10:30AM contained very encouraging
signs for the Canadian economic outlook. For instance, the percentage of companies expecting sales to grow faster
during the next 12 months (net of those expecting a slower pace of growth in sales) stands at its highest level since
2014Q3 (31%, see chart). Also, M&E investment intentions remain robust while hiring intentions hit an all-time high.
More importantly, a 25bps hike on July 12th was reinforced earlier this week with hawkish comments from Governor
Poloz and Deputy Governor Patterson. The intended first step of this new Canadian monetary tightening cycle is to
withdraw the 50bps accommodation put in place in the midst of the 2015 oil shock. Also, an overlooked factor making
it easier for the BoC to move away from the sidelines is that the tightening in mortgage rules put in place in late 2016
by the federal government has started to reduce the excessive risk taking on the housing market, namely new
borrowers with elevated LTV ratios.
In summary, the Canadian economic recovery is about the gain further traction. Thus, the BoC is very likely to hike its
policy rate in July 12th despite the bleak market sentiment about oil prices, the cooling GTA housing market and the
considerable uncertainty regarding the impact of Trump's policies on the Canadian outlook. This being said, it is
premature in our view to start pricing more than two 25 bps hikes within the next 12 months.
Sébastien Lavoie | Chief Economist
514 350-2931 | lavoies@vmbl.ca