Several economists are expecting the Bank of Canada to hold interest rates in its upcoming announcement following the weakening economic conditions, according to The Canadian Press.

Many believe that the central bank will be keeping its key interest rate at 5%, with a first rate cut set to arrive around June, as the economy slows at a slightly stronger pace than the central bank’s expectations.

“At the margin, things are looking a little bit weaker than what the Bank of Canada might have envisaged. Domestic spending was lower in the fourth quarter than it was in the third quarter. And that’s particularly concerning, given the fact that the population grew so dramatically during that period,” said Royce Mendes, managing director and head of macro strategy at Desjardins.

While growth in the economy by an annualized rate of 1% in Q4 exceeded the expectations of economists as well as the central bank’s forecast, the headline figure may be hiding the true state of the economy.

“This is probably the weakest one-per-cent growth I think any of us have lived through,” said Doug Porter, chief economist at the Bank of Montreal (BMO).

The central bank’s rate hikes have largely contributed to the slowing Canadian economy, with consumers being forced to cut back on spending as many of them continue to deal with higher borrowing costs on mortgages as well as other debt.

While companies are also impacted through the falling business investment, the unemployment rate showed a much more positive result compared to other parts in the economic data as Statistics Canada’s labour force survey showed that it managed to decrease to 5.7% in January, which was near the levels seen prior to the pandemic.

“I think the Bank of Canada is looking at all of these data in totality, and will come to the conclusion that if anything, the labour market has weakened since the time of the January monetary policy report,” said Mendes.

Most observers will be closely watching the Bank’s language regarding core measures of inflation.

“At the least I expect the Bank of Canada to take a more holistic view of the inflation indicators and to acknowledge the progress that we are seeing in taming underlying inflationary pressures. If they don’t, I would take that as a very, very hawkish signal,” said Mendes.

Source CMP
By Abigail Adriatico