Will the Bank of Canada hike rates again? This week will decide

Anyone worried about interest rates, economic growth and jobs numbers is bracing for a busy and consequential week. Canadians will be hit by a tsunami of economic data over the next 10 days.

The latest inflation numbers, data on how much stuff Canada's economy is cranking out and a key reading on the mood of consumers won't just tell us how the economy has performed through the first half of the year, they'll set policy decisions that will dictate how the rest of the year will unfold.

"I would say it's very important," saidRBC economist Carrie Freestone.

Freestone said she believes the Bank of Canada will probably raise rates when it meets on July 12, but that this week's data should tell us all we need to know about the bank's decision.

"We think they're gonna go 25 (basis points). They could have to hike higher if we're in a situation where expectations are not tamed," she told CBC News.

The Bank of Canada has been aggressively raising interest rates in an attempt to rein in inflation. The theory is that as rates rise, consumers are squeezed by higher debt payments.

With more money going toward servicing their debt, Canadians have less of it to spend anywhere else. That tends to slow down the economy and bring down prices which is exactly what the Bank of Canada is trying to accomplish with rate hikes in the first place: bring down inflation.

The problem is through most of this year, economic data have come in hotter than expected.

Gross domestic product, the total value of all goods and services produced by the country's economy, grew at an annualized rate of 3.1 per cent in the first quarter of 2023. Canadian employers have added more than 230,000 jobs so far this year.

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Retail sales numbers from Statistics Canada show increases in all sectors but furniture, appliances and electronics. Analysts say it is due to higher prices rather than people making more purchases, which has them forecasting another interest rate hike in July.

And just last week, retail sales figures showed Canadian consumers were still spending at rates that just don't show an economy that is slowing.

"In some ways it feels like in the Road Runner when Wile E. Coyote runs off a cliff and he just hasn't looked down yet," said Randall Bartlett, the senior director of Canadian economics at Desjardins Group.

"Households are getting more and more squeezed, but they're continuing to behave in a way that doesn't necessarily reflect that reality of higher borrowing costs and higher inflation," said Bartlett.

And that's why this week's data are so important.

Prices continue to rise, but slower

Economists surveyed by Bloomberg say year over year inflation numbers will show a sharp deceleration in price growth. Inflation peaked last summer at 8.1 per cent. Prices continue to rise, but at a steadily slower pace.

Then last month, Statistics Canada saidprices began to accelerate again. The year over year, headline rate jumped from 4.3 per cent to 4.4 per cent.

This week, economists expect some solid progress in the fight to rein in inflation. RBC's forecast shows headline inflation likely fell to 3.6 per cent.

"It's a huge drop," saidRBC's Claire Fan. "But a lot of that decline can be explained away by lower energy prices."

Last May, gas prices were climbing inexorably toward a peak above $2 per litre. Compare that to gasoline prices in May of this year, where they hovered between $1.50 and $1.60.

Fan says that drop will help consumers weather higher prices. But she says the Bank of Canada is looking for a sustained drop in a measure of inflation that economists call the core rate because it strips out volatile things like gasoline and food, which tend to move up and down a lot.

She says the central bank will be watching GDP numbers closely as well.

Her forecast shows economic growth in April will come in flat. But Fan says that month saw a strike by the Public Service Alliance of Canada. If you strip out the economic impact of that, she says the economy expanded once again in April.

Most economists assume a rate hike is coming

Data on GDP and inflation give folks like Fan and others some hard numbersto gauge how the economy is doing, but two releases from the central bank also set to come out this week should paint a picture of how Canadian businesses and consumers are feeling.

The Business Outlook Survey tells us how businesses feel about the state of the economy today and how they expect to adjust hiring and investments over the course of the rest of the year. Similarly, the Survey of Consumer Expectations provides a glimpse into how households are managing inflation, higher borrowing costs and whether they intend to slow down consumer spending.

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Right now, most economists assume the Bank of Canada has another interest rate increase up its sleeve. The bank has repeatedly said the perils of high inflation are a threat to everyone and risk upending financial stability. Bank of Canada governor Tiff Macklem has said he needs to see economic growth slow further as evidence of the kind of progress the bank is looking for.

Fan, for one, said she thinks it will take considerable changes to the forecast for the bank to back away from another increase in interest rates.

"It would likely take substantial downside surprises in data releases (i.e., lower inflation and / or GDP data) to prevent another hike at the next meeting in July," she wrote in a note to clients.

But if there's been one constant in these three and a half years or so, it's that every time economists say they have a handle on what's going to happen next, the data come in as a surprise.