The stage is set

Not that there was much doubt anyway, but the strong Canadian GDP data released by Statistics Canada today make it certain that the Bank of Canada will start a tightening cycle on Wednesday, raising its rate target by 25 basis points. It would normally be safe to assume that this would be the first of several moves this year, but the extreme uncertainty over the geopolitical situation makes it hard to be sure how quickly the Bank will be able to act.

Real GDP rose 1.6 percent in the final quarter of 2021, up from 1.3 percent in the prior quarter. This brought growth for the year as a whole to 4.5 percent, following on from the 5.2 percent decline posted in 2020 -- a decline which, it should be recalled, was entirely concentrated in the first half of the year.  In some respects the Q4 data were a little weaker than the headline suggests: final domestic demand rose only 0.7 percent, less than half the rate posted in Q3. Real growth was driven by the rather obscure category of home ownership transfer costs, as well as a rise in business inventories that historical trends suggest is unlikely to persist for very long. 

StatsCan also reported real GDP data for the month of December. This showed GDP basically unchanged from the previous month, which is a surprisingly strong reading given the hasty reimposition of COVID restrictions as the omicron wave ramped up. As these restrictions remained in place through January, it is equally surprising that StatsCan's preliminary estimate for that month sees GDP growth of 0.2 percent. This points to a robust growth pace for Q1 as a whole, given the removal of many of the COVID restrictions in February and early March. 

It remains to be seen whether rate hikes can bring inflation back towards the Bank of Canada's 2 percent target without slowing the economy to an unacceptable degree. Much of the upward pressure on prices is due to supply chain issues, which are hardly unique to Canada. The Russian invasion of Ukraine will only add to international inflationary pressures, in areas from energy to wheat and fertilizers. The Bank's main hope in raising rates at this stage must be to keep inflation expectations in check as it waits and hopes for international pressures to ease. The timing for that seems to be growing more uncertain by the day.