A July rate hike in Canada is 'a lot less of a done deal' after GDP slows

REUTERS/Christinne Muschi

• Canadian GDP grew 1.3% in the first quarter of 2018.
• A slowing housing market is weighing on economic activity.
• Some economists say a Bank of Canada rate hike next month now looks a lot less likely.

After economic activity in Canada slowed more than expected in the first quarter, some economists think chances of the central bank raising its key rate next month are looking slim.

Canada's gross domestic product grew 1.3% in the first quarter, Statistics Canada data showed Thursday, compared with economist expectations of 1.8%. A sluggish housing market weighed on economic growth, with home investment seeing the sharpest quarterly drop in nine years.

The data came a day after the Bank of Canada kept its benchmark interest rate steady at 1.25% and offered an upbeat tone on the economy. The central bank dropped a reference to remaining "cautious" on monetary policy, which raised speculation that the benchmark rate could rise as soon as July.

But Paul Ashworth, an economist at Capital Economics, said a July rate hike now looks like "a lot less of a done deal." He said there is "little hope of an imminent rebound" for the housing market, which has recently seen stricter regulations and higher mortgage rates.

Housing starts fell last month, according to data from the Canada Mortgage and Housing Corporation, to 214,379 units from 225,459 in March. And home prices are plummeting, with the average house price in Canada dropping more than 11% in April from a year ago.

Elsewhere, trade tensions with the US could further drag on the Canadian economy. The Commerce Department announced Thursday that exemptions from hefty tariffs on steel and aluminum imports to the US are set to expire at the end of the day. The move puts further strain on stalled NAFTA negotiations, which analysts think could drag into next year.

"That doesn't seem like the environment that would require higher interest rates," Ashworth said.