Economists expect Bank of Canada will pause interest rate cuts following surprise GDP growth
The Canadian economy grew more than expected in the first three months of 2025 as businesses tried to get ahead of U.S. President
Donald Trump's
tariffs, prompting economists to reevaluate their predictions for the upcoming Bank of Canada interest rate decision.
Real gross domestic product (GDP) grew at an annualized pace of 2.2 per cent, Statistics Canada reported Friday morning. That's higher than the agency's early estimate of 1.5 per cent and the economist consensus of 1.7 per cent.
'The key point here is that the GDP figures are sending no obvious distress signals so far in 2025,' BMO economist Douglas Porter wrote in a note to clients.
He pointed out that Canada's economy was among the top performers in the G7 as GDP dropped in both the U.S. and Japan last quarter.
'With this sturdy set of results, we are officially abandoning our call of a (Bank of Canada) rate cut next week,' he said RBC economists also said they believe the bank will be holding rates steady.
Canada exported more cars, industrial machinery, equipment and parts in the first quarter, StatCan said. At the same time, imports for those kinds of goods rose.
'The threat of tariffs can be expected to influence trading patterns and incite importers to increase shipments prior to these tariffs being implemented to avoid additional costs,' StatCan wrote.
But while Friday's headline might indicate the Canadian economy is faring well, 'digging beneath the surface suggests otherwise,' said TD economist Andrew Hencic in a note.
Household spending slowed in the first quarter with Canadian consumers spending less on passenger vehicles. Residential investment also decreased as resale activity slumped.
Other economists than Porter seem less sure on what Friday's news will mean for the Bank of Canada's interest rate call next Wednesday. The policy rate currently sits at 2.75 per cent.
Experts are concerned about surging unemployment,
particularly among young people
. But the bank's preferred 'core' inflation measures, which exclude the impacts of the consumer carbon tax removal,
heated up last month
.
'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,' wrote Capital Economics economist Stephen Brown in a note to clients.
'Indeed, market participants are more convinced than us, with interest rate swaps pricing in an 80 per cent chance of a pause,' as of Friday morning, he said.
Last Wednesday,
an American federal court blocked Trump from imposing sweeping tariffs
under an emergency-powers law.
But, for now, the tariffs will remain in place while he appeals the decision by the U.S. Court of International Trade.
With files from The Associated Press.
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