How will the Bank of Canada react?
Canada’s economy posted a stronger than expected performance in May, with overall projected expansion in the second quarter potentially giving the Bank of Canada pause for thought as it weighs up further interest rate cuts in the months ahead.
Statistics Canada said on Wednesday that gross domestic product (GDP) increased in May by 0.2% after also rising in April, leaving the economy on track to grow at an annualized rate of 2.2% in Q2 – a faster clip than both economists and the Bank of Canada had forecast.
In the first quarter of the year, GDP increased at a pace of 1.7%, and experts had predicted growth would come in around 1.5% between April and July.
The goods-producing sector saw growth of 0.4% in May, higher than service-sector expansion of 0.1%, as manufacturing was boosted by the resurgence of petroleum refineries. Still, the mining, quarrying, and oil and gas extracting sector posted a downturn and the retail sector weighed on growth.
Could the Bank of Canada change its tune on rate cuts?
While the pace of economic growth both in May and the second quarter overall was stronger than anticipated, Royal Bank of Canada (RBC) indicated momentum appeared to be waning towards the tail end of the quarter.
That means the Bank of Canada will likely still push ahead with its expected schedule for rate cuts, according to RBC economist Abbey Xu. “We think the economic backdrop should give the Bank of Canada room to deliver another interest rate cut at their next meeting in September,” Xu said.
In total, RBC still expects the central bank to cut its benchmark rate by a further 50 basis points before the end of 2024, a move that would bring it to 4.0% – down from a 23-year high of 5.0% in early June.
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