Canada's economic slowdown spurs rate cut speculation

Canada's economy showed signs of weakness in the first quarter, falling short of analysts' estimates according to data released by Statistics Canada on Tuesday. The development has heightened expectations that the Bank of Canada (BoC) may consider lowering interest rates in June to stimulate growth.

Gross domestic product (GDP) in Canada grew by only 0.2 per cent in February, lower than the forecasted figure, with expectations of continued muted growth in March. The slowing economy, coupled with subdued inflation, may prompt the BoC to reassess its monetary policy stance, potentially lowering its key interest rate from its current 23-year high of 5 per cent.

Benjamin Reitzes, managing director and Canadian rates and macro strategist at BMO Capital Markets, noted that the loss of economic momentum in the quarter "puts additional pressure on the BoC to begin cutting as soon as June."

Preliminary estimates for March suggest that GDP remained unchanged from February, with gains in certain sectors offset by declines in manufacturing and retail trade. While January saw growth, it was revised downward from initial estimates.

The quarterly GDP figures, set to be released next month, will provide a more comprehensive view of Canada's economic performance.

Despite the recent slowdown, the BoC had previously forecasted growth of 2.8 per cent in the first quarter and 1.5 per cent in the second quarter. However, economic conditions have since changed, prompting speculation of a potential rate cut in the near future.

Royce Mendes, head of macro strategy for Desjardins Group, stated, "We continue to see the Bank of Canada beginning a rate cutting cycle in June."

Following the release of the GDP data, money markets adjusted their expectations, with the likelihood of a rate cut in June increasing to close to 60 per cent. Additionally, a cut in July is now fully priced in.

In response to the data, the Canadian dollar weakened slightly, while the yield on the two-year Canadian government bond rose.

The BoC, which had previously raised rates to address rising prices, has indicated that a reduction in borrowing costs may be warranted if inflation continues to cool. Headline inflation stood at 2.9 per cent in March, aligning with the central bank's projections.

While February's GDP growth was driven by the services sector, particularly transportation and warehousing, overall growth was tempered by stagnation in the goods-producing sector.

(With Reuters inputs)