Markets are increasingly betting on a rate hike by the Bank of Canada next week, with a two-in-three chance of another increase in December. This shift in expectations follows a hawkish tone from Governor Tiff Macklem, though economist David Rosenberg disagrees with the timing, citing the fragile state of the Canadian economy.
The Canadian economy has lost over 40,000 jobs this year, with weak GDP growth, a struggling housing market, and contracting manufacturing activity. While gasoline prices have surged 28% over the past year, core inflation measures remain at or below the central bank’s 2% target. Rosenberg argues that the inflation is driven by global supply shocks, not domestic demand, making a rate hike inappropriate.
Macklem is concerned about sustained headline inflation around 3% for three consecutive months, fearing spillover effects. However, Rosenberg points out that there is no evidence of broader inflationary pressures despite eight months of the U.S.-Iran conflict. He also criticizes the Bank of Canada’s focus on consumer expectations surveys, which he views as unreliable indicators.
Wage growth has slowed to 2.3% year over year, down from 3.3% a year ago, signaling labor market slack. Rosenberg emphasizes that the current economic conditions do not justify a rate hike, especially with anemic population growth and weak economic activity.