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Strong January GDP growth

What the latest GDP figures mean for the Bank of Canada’s rate cut timing

Canada’s stronger-than-expected GDP growth in January could pose a challenge for the Bank of Canada, potentially complicating the timing for its anticipated interest rate cuts.

Economic growth rose 0.6% in January, and early estimates point to another 0.4% monthly rise in February, according to figures released by Statistics Canada.

The growth was largely influenced by a rebound in educational services (+6.0%), due to the resolution of public-sector strikes in Quebec, while goods-producing sectors were also up 0.2% on the month.

Should the flash estimate for February hold, BMO Chief Economist Douglas Porter noted that even a flat reading in March would result in annualized first-quarter growth of 3.5%. That would be well above the Bank of Canada’s current Q1 forecast for growth of just 0.5%.

What it means for expected rate cut timing

While economists caution against reading too much into one strong month of data, they agree that if the trend continues, it’s likely to complicate the Bank of Canada’s coming monetary policy decisions.

For now, markets continue to expect the Bank to deliver its first quarter-point rate cut as early as its June meeting. However, bond market pricing for a June rate cut dropped from 70% to 65% following the release of the GDP data.

“The surprisingly healthy start to 2024 points to above-potential growth in Q1, which could make the BoC a bit less comfortable with the inflation outlook,” Porter wrote. “Our call for a June rate cut still hinges on the coming CPI reports, but if this strength in activity is close to replicated into Q2, the BoC will see much less urgency to cut rates any time soon.”

TD Economics’ Marc Ercolao said the “robust” growth figures present a “difficult challenge” for the Bank.

“Over the past two months, the Bank has received solid evidence that inflation is cooperating, but strong GDP data prints like today’s will keep them on their toes,” he wrote. “Market pricing is still hopeful of a first interest rate cut happening in June, though we think a July cut is more likely.”

Population growth masks weak GDP per capita

Meanwhile, Randall Bartlett, Senior Director of Canadian Economics at Desjardins, said the Bank of Canada is likely to “look through” the real GDP reading for January, due to the oversized impact of the rebound in educational services.

He added that strong population growth, fuelled by international migration and a sharp increase in the admission of non-permanent residents, has also masked weakness seen in real GDP growth per capita, which has been on a downward trend since the start of the year.

He notes that the federal government’s recent announcement that it will reduce the number of non-permanent resident admissions—to 5% of the total population from 6.2%—will “weaken this material tailwind to both growth and inflation going forward.”

“As such, we are of the view that the Bank remains on track to begin cutting interest rates at its upcoming June meeting,” he said.