Soft GDP figures point to a BoC rate cut next week, but uncertainty remains

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Canada’s economy slowed more than expected in the first quarter, raising the odds of an interest rate cut next week by the Bank of Canada, economists say.

However, not everyone thinks the central bank will be ready to pull the trigger at next week’s meeting.

The latest GDP data released by Statistics Canada on Friday showed Canada’s economy flat-lined in March, resulting in a slower-than-expected growth rate of 1.7% for the first quarter, falling short of the 2% expected by economists.

Per-capita GDP, which corrects for the country’s rapidly growing population, declined for the sixth quarter out of the last seven.

Meanwhile, StatCan also revised down previously released fourth-quarter growth from +1% to just +0.1%.

June rate cut odds rise

As a result, bond markets upped the odds of a quarter-point Bank of Canada rate cut on Wednesday to 70%, with a July rate cut fully priced in.

“The downside surprise in Canada’s Q1 GDP growth likely removes the last potential barrier preventing the BoC from easing off the monetary policy brakes with an interest rate cut next week,” wrote RBC Economics assistant chief economist Nathan Janzen.

While recent economic data hasn’t deteriorated to a point that would force “urgent” action by the central bank, Janzen did note that per-capita output is now back at 2016 levels, while monthly increases in the Bank’s preferred core inflation measures are running below its 2% neutral target.

“Given that backdrop, there is little reason for the Bank of Canada to wait longer to begin at least a gradual easing cycle,” he said.

BMO Chief Economist Douglas Porter agrees, noting that despite the recent monthly and quarterly “wobbles” in the GDP data, in total the economy has only expanded by a “meagre” 0.5% in the past year.

“For the Bank of Canada, we believe the main message is that the output gap is widening, as reinforced by a less-tight job market, modestly increasing the chances of a rate cut next week,” he wrote. “There are respectable arguments on both sides of the decision, but we believe the balance of evidence points to a cut.”

Bank of Canada “could go either way”

However, not everyone is fully convinced that a June rate cut is certain.

James Orlando, senior economist at TD Economics, notes that the Bank of Canada has not signalled any intention to change rates just yet.

“This central bank has a track record of clearly communicating its intentions before implementing monetary policy changes,” he explained. “To maintain this transparency and forward guidance, we anticipate that the BoC will hold rates steady next week and use the meeting to set the stage for a potential rate cut in July.”

“Nonetheless, expect some surprises, as the BoC’s decision could go either way,” Orlando added.

And while economists at Oxford Economics are leaning towards a June rate reduction, they concede the Bank of Canada could also further delay its first rate cut.

“There’s a chance that the Bank of Canada chooses to hold rates in June and postpone cutting until July or September,” they wrote. “Nonetheless, we don’t think this would materially alter prospects for the economy.”

https://www.highcpmgate.com/f0c2i8ki?key=d7778888e3d5721fde608bfdb62fd997

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