Market bets for a Bank of Canada rate cut next week have dwindled further after this morning’s stronger-than-expected GDP report, and both the Bank of Montreal and Citi have abandoned their prediction that further monetary easing will be announced on Wednesday.
However, there is still a minority of economists who believe the bank will cut rates next week, and most agree it’s going to be a close call.
Gross domestic product in the first quarter grew by 2.2% on an annualized basis as compared with the downwardly revised 2.1% growth posted in the previous quarter, Statistics Canada said. On a monthly basis, GDP grew by 0.1% in March after a contraction of 0.2% in February. Statistics Canada, in its so-called flash estimate, predicts the economy will expand by 0.1% in April.
This was the final economic indicator before the Bank of Canada’s rates decision on Wednesday.
Money markets now see only about a 16% probability of a rate cut June 4, down from 28% prior to today’s GDP release. Nevertheless, markets are still pricing in between one and two quarter-point rate cuts by the end of this year.
Here’s how implied probabilities of future interest rate moves stood in swaps markets moments after the 830 am ET data, according to LSEG data. The overnight rate currently resides at 2.75 per cent. While the bank moves in quarter-point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
Here’s what they looked like minutes before the data:
Here’s how economists are reacting in written commentaries this morning:
Douglas Porter, chief economist with BMO Capital Markets
“The Canadian economy looks to have held up reasonably well in the opening months of the trade war, and even the most recent figure for April suggests growth is weathering the trade storm. ... The details of the quarterly gain were much less impressive than the headline would suggest, but given the intense uncertainty in the opening months of 2025, that’s a minor point. Perhaps the most surprising aspect of today’s release was found in the monthlies, where March’s initial estimate of a 0.1% gain held, and the flash for April was also a surprisingly—nay, amazingly—resilient +0.1%, in the very heart of the trade and election uncertainty. ...
On the monthlies, the big story behind the 0.1% gains in both March and April was strength in the resource sector. Mining and oil & gas rose by a whopping 2.2% in March with big gains across the board, and StatCan tells us that this sector led the way in April as well. Construction and retail trade chipped in for March’s gain as well. In sharp contrast, manufacturing was a notable drag in both months—which was fully expected—falling 0.4% in March and reportedly down in April as well. The March drop left manufacturing output down 0.7% y/y, one of the weakest sectors and well below the overall economy’s 1.7% y/y growth rate.
Bottom Line: The key point here is that the GDP figures are sending no obvious distress signals so far in 2025. While we can certainly quibble around the details, the Bank of Canada will surely seize on the headline outcome as well as the decent gain for April. With this sturdy set of results, we are officially abandoning our call of a rate cut next week, and now look for the next rate trim eight weeks hence at the late-July decision."
Veronica Clark and Gisela Young, economists at Citi
BoC officials have approached recent decision making with a much less forward-looking eye than usual, which complicates how we think officials will decide on the appropriate policy rate next week. Recent data have been mixed enough – with soft employment and housing data but sticky core inflation and 2.2% Q1 GDP – that we now think rates will remain unchanged at 2.75% on Wednesday. ... A number of indicators suggest further slowing in growth and inflation this year. Upside risks to inflation should be perceived as lower than at the time of the April decision. We think it is highly unlikely that substantial uncertainty, escalating global trade tensions, unemployment close to 7%, falling home sales and prices, and slowing growth in the US is a world in which neutral policy rates are the appropriate setting this year. We continue to expect rates to reach 1.75%.
Royce Mendes, managing director and head of macro strategy, Desjardins
“Despite the strength in headline GDP, the domestic economy looked very frail. Final domestic demand contracted 0.1%. Housing was particularly weak during the quarter and consumer spending also printed soft. Household spending per capita was up just 0.1% in Q1, down sharply from the 0.8% growth rate in Q4 2024. While business fixed investment proved more resilient, the fact that it was driven by equipment and machinery could indicate that some of the strength was due to firms trying to front run retaliatory tariffs.
Given the temporary volatility in the trade data during the quarter, the reading on final domestic demand provides a clearer signal of the health of the economy. The stagnation in that indicator points to a disappointing underlying growth rate relative to the already-tempered expectations. Furthermore, revisions also cut the Q4 2024 GDP print down to 2.1% from the 2.6% growth previously estimated, pointing to less momentum towards the end of the year. ...
The weak final domestic demand reading for Q1 suggests that the economy was stalling even before feeling the full impact of tariffs. Given the deterioration in recent labour market indicators, we believe that the economy will struggle to post meaningful growth in the second quarter. Despite the upward move in core measures of inflation, which looked to be driven by one-off factors, we expect the Bank of Canada to cut rates another 25 basis points next week."
Stephen Brown, deputy chief North America economist, Capital Economics
“Despite the upside surprise to first-quarter GDP growth, the contraction in domestic demand means we are sticking to our view that the Bank of Canada will cut interest rates again next week.
The 2.2% annualised gain in first-quarter GDP was better than the flash estimate of a 1.5% increase, although probably partly reflects the downward revision to fourth-quarter growth to 2.1%, from 2.6%. Either way, the details were far more concerning than that headline figure might suggest. Most of the growth stemmed from net trade, as a 6.7% annualised rise in exports outpaced a 4.4% gain in imports amid tariff front-running in the US, as well as a big boost from the volatile inventories component. Elsewhere, consumption growth slowed to just 1.2% annualised, from 4.9%, gross fixed capital formation sank by 3.1% as residential investment fell by 11% annualised and business investment growth slowed, and government spending also surprisingly contracted, albeit by a modest 0.3%. ...
Even with that likely gain in GDP in April, quarterly growth is still set to slow toward just 0.5% annualised at best this quarter. The upshot is that there is still a strong case for the Bank to cut next week although, amid the extreme tariff uncertainty following events this week, we clearly can’t rule out another pause as the Bank awaits for more information."
David Rosenberg, founder of Rosenberg Research
“The Canadian economy surprised to the upside in the first quarter, but there were a ton of caveats. Headline real GDP growth came in at a +2.2% annual rate, which topped consensus views of +1.7% and the Bank of Canada’s latest published projection of +1.8%. But the fourth quarter was taken down to +2.1% from +2.6%, which completely blunts the better-than-expected Q1 print. The headline also was skewed by a +6.7% annualized advance in exports as Canadian businesses frantically moved to ship goods into the U.S. ahead of the tariffs, and without that influence, the economy was nearly as flat as an ice hockey surface.
Tack on a huge positive inventory swing for the same tariff-induced distortion, and the real story in the first-quarter was a -0.1% dip in real final domestic demand, which was the first contraction since the fourth quarter of 2023. ...
The monthly GDP showed March coming in soft at +0.1% MoM, and so the “hand off” to Q2 is a paltry +0.5% annual rate. What that means is that the disinflationary output gap is widening again and, as such, the BoC would be well advised to get off its derrière. After all, +0.5% is not far off the flat number the Bank had estimated in its first tariff shock scenario in its latest Monetary Policy Report. To be sure, not the disaster in the second scenario (-1.3%), but the economy is sufficiently weak to allow the BoC to bring the policy rate down to the lower end of its neutral range of 2.25%-3.25%, which means at least two more cuts are required."
Andrew Hencic, director and senior economist, TD Economics
“The top line measure would suggest the Canadian economy continues to chug along at a decent clip, but digging beneath the surface suggests otherwise. Trade tensions and the uncertainty they heaped on the economy have started to show through on activity. Consumers have taken their foot off the gas, and absent the potential front running of tariffs leading to a buildup of inventory (and potentially some equipment installation) there wasn’t much to celebrate on the business investment front either.
Markets have all but ruled out a cut from the Bank of Canada (BoC) next week. However, when looking beyond the headlines there are some real cracks emerging in the economy. The unemployment rate is up to 6.9% (6.6% in January and 6.2% last April), and domestic demand has all but petered out. With the tailwinds from last year’s rate reductions fading, the BoC should have room to deliver two more rate reductions this year and give the economy a bit more breathing room."
Tony Stillo, director of Canada economics, and Michael Davenport, senior economist, at Oxford Economics Canada
“We think Canada’s economy has slipped into a trade war-induced recession that will last through the end of 2025. However, with uncertainty about tariffs and how they will impact the economy and prices still elevated, we expect the Bank of Canada to hold rates steady on June 4 as it tries to balance the downside risks to growth against the upside risks to inflation from the trade war.”
Nathan Janzen and Abbey Xu, economists with Royal Bank of Canada
“The Bank of Canada’s interest rate decision next week will still be a close call, but with economic data holding up better than feared - and inflation in April surprising broadly on the upside once controlling for the removal of the consumer carbon tax from energy products - a second consecutive hold on the overnight rate looks more likely than a cut at this stage."
Taylor Schleich and Ethan Currie, economists with National Bank
“We expect the Bank of Canada to leave its policy rate unchanged at 2.75%. Ultimately, our call hinges on policymakers’ judgement that they can’t be forward-looking. If they could be forward-looking (and despite uncertainty, we’d argue they should be), we see it as a clear-cut decision to ease. But if policymakers are, as they imply, able to only react to the data they have in hand, the picture is admittedly mixed. The labour market—which carries a lot of weight—is consistent with further rate relief, but the inflation picture right now isn’t giving the green light. There are also still key unknowns on trade impacts, inflation expectations and fiscal policy which further obscure the picture. Really though, if the Bank was comfortable holding steady in April when the outlook looked even more troubled, they should be fine waiting eight weeks from here. The next decision in July will bring more data (to gauge tariff impacts), another Business Outlook Survey and greater clarity on the U.S. trade relationship with Canada (and the world). We expect that by the time 30-Jul arrives, inflation anxiety will have moderated as economic slack accumulates and dominates modest tariff-driven inflation. This would tip the scales towards a cut. Further out, our outlook for two quarters of negative growth, an unemployment rate above 7% and on-target inflation is consistent with the overnight target reaching 2% by year-end."
Charles St-Arnaud, chief economist, Alberta Central credit union
“Today’s GDP shows that the Canadian economy was stronger than expected at the start of 2025. However, this strength is likely to be temporary. As such, the sharp narrowing of the US trade balance in April could suggest weaker exports in Q2. Moreover, domestic demand in Canada, especially consumer spending remains lackluster. While the likelihood of a contraction in Q2 has diminished, growth is expected to be very close to 0%.
With this in mind, the BoC decision at next week’s meeting will be a very close call. On one side, inflationary pressures remain elevated, with core inflation above target and underlying dynamics suggesting it will remain the case for some months. On the other side, growth is weak (even though not contracting) and the weak labour market should lead to further increase in the unemployment rate with spillovers on the economy. We think that ultimately, the BoC will opt for a forward-looking approach that increasing slack in the economy will bring down inflation and will choose to cut by 25bp. However, the level of conviction on this view is very low and the BoC could opt to pause until July to have more information at hand."
Derek Holt, vice-president, Scotiabank Economics
“Canada’s economy is strong enough for the Bank of Canada to remain on hold next Wednesday alongside other reasons for doing so. Our longstanding call remains no rate change.”
Bryan Yu, chief economist, Central 1 credit union
“The latest GDP data points to a softening in underlying conditions, particularly in consumer spending and housing, but there is still more resilience than expected as seen in the latest monthly industry-GDP numbers. The firm gain in headline GDP, coupled with core inflation trending above 3 per cent could push the Bank of Canada to the sidelines next week as it seeks more clarity on the path of the economy and tariffs. That said, with final domestic demand flat in Q1, headline inflation at 1.7 per cent, and more headwinds ahead and the unemployment rate at 6.9 per cent, a narrative to cut is still plausible. We still see the Bank cutting at next week’s meeting.”