Bank of Canada Interest Rate Announcement

The Bank of Canada once again opted to maintain its target for the overnight rate at 1 per cent. In its accompanying statement, the Bank highlighted that inflation continues to move below the Bank's 2 per cent target due to significant excess supply in the Canadian economy. It also noted that the risks to inflation appear to be to the downside, meaning it sees the risk of continued below target inflation as a more likely outcome than a rise in inflation. This, along with the Bank's expectation of a "soft landing" in the Canadian housing market, suggest that monetary policy will remain highly accommodative.

The Bank of Canada is currently projecting that excess supply in the Canadian economy will be eliminated sometime in mid-2015. Keeping in mind that the Bank has spent the past several years pushing that date back, if the Canadian economy does accelerate as most expect in 2014, a gradual rise in short-term interest rates will follow. Importantly, an uptick in Canadian economic growth next year will most likely be the result of stronger external demand, particularly from a resurgent United States.  However, stronger growth in the US economy will also put upward pressure on long-term yields, lessening some of the urgency for monetary tightening. For that reason, we expect that eventual Bank of Canada tightening will occur very slowly, beginning with a 25 to 50 basis point increase in the overnight rate in 2015.

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Canadian Third Quarter Real GDP Growth

The Canadian economy grew 2.7 per cent at an annual rate in the third quarter, the fastest pace of growth in almost two years.  The economy was given a boost by an uptick in business investment which helped to offset a slight deceleration in household spending and a dip in exports. Moreover, while third quarter growth was strong, a significant portion of that growth came from accumulation of inventories and therefore we do not expect a repeat performance in the fourth quarter. 

Although today's GDP report was welcome news for the Canadian economy, It is unlikely to influence the Bank of Canada's interest rate decision next week. It will take several quarters of similar growth and a concomitant rise in inflation before the Bank of Canada moves on interest rates, an outcome we do not see until 2015.

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BC Commercial Leading Indicator Points to Growth in 2014

The British Columbia Real Estate Association (BCREA) Commercial Leading Indicator (CLI) rose for the third consecutive quarter, increasing 0.4 points in the third quarter of 2013 to 114.1. On a year-over-year basis, the CLI is 0.8 per cent above the third quarter of 2012 after reaching an all-time high of 116.1 in the second quarter of 2007.

After flattening out through 2012, the trend in the CLI has turned upward. An upturn in the CLI trend is historically a good signal of expanding commercial real estate activity in the following two to four quarters.

"The CLI rose for a third consecutive quarter as growth in retail sales and office employment more than offset a decline in financial conditions,” said Brendon Ogmundson, BCREA Economist. “The rising trend in the CLI points to an improving BC economy and stronger commercial real estate activity in 2014."

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Canadian Retail Sales and Consumer Price Inflation

Canadian retail sales rose 1 per cent in September, the third consecutive monthly increase. The advance in sales was largely attributable to higher sales of motor vehicles and parts. Excluding motor-vehicles, sales were flat.  Given today's retail sales data, our Canadian GDP tracking model estimates third quarter growth at 2.7 per cent.

Retail sales in BC were up for  a second straight month, rising 0.4 per cent month-over-month. Compared to September 2012, sales were up 3.1 per cent.  Year-to-date, BC retail sales are up just 1.1 per cent.

Declining gas prices pushed Canadian inflation lower in October, falling from an annual rate of 1.1 per cent in September to just 0.7 per cent in the 12 months to October. The Bank of Canada's preferred measure of core inflation, which excludes the most volatile components of the CPI, continues to trend well below the Bank's 2 per cent inflation target, rising just 1.2 per cent.

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BCREA Housing Market Update (November 2013) (+playlist)

BCREA Commercial Leading Indicator Discussion (November 2013) (+playlist)

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Dominion Lending Best Rate Mortgages

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Canadian Manufacturing Sales

Canadian manufacturing sales increased 0.6 per cent in September, the fourth increase in the past five months. The increase was primarily the result of higher sales in the motor vehicle assembly and food industries, though sales rose in 11 of 21 manufacturing sectors.

In BC, manufacturing sales rose 2.3 per cent from August and 4.5 per cent year-over-year. September's increase in sales was fairly broad based with shipments of both non-durable goods growing 3 per cent and durable goods rising 1.7 per cent.  Year-to-date, total BC manufacturing sales are 1.8 per cent higher than last year.

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