Bank of Canada Expected to Maintain Patience Amid Weakening Economic Conditions

Ahead of the upcoming interest rate announcement by the Bank of Canada, economists anticipate a message of patience in light of the deteriorating economic conditions. The central bank is likely to hold its key interest rate at 5% with expectations of potential rate cuts in the coming months.

Royce Mendes, the managing director and head of macro strategy at Desjardins, noted that while the Canadian economy expanded at an annualized rate of one per cent in the fourth quarter, there are concerns lurking beneath the surface. Domestic spending dipped in the last quarter despite a significant increase in the population during the same period.

Doug Porter, the chief economist at BMO, expressed his view on the economic growth, describing it as potentially the weakest one-per-cent growth in recent memory. The Bank of Canada’s aggressive rate hikes have played a significant role in the economic slowdown, impacting consumer spending and leading to a decrease in business investment.

The labour market, however, has shown some resilience, with the unemployment rate dropping to 5.7% in January, closely resembling pre-pandemic levels based on Statistics Canada‘s labour force survey. Mendes warned of potential weaknesses in the labor market revealed by payroll data, suggesting a more nuanced view compared to the optimistic survey results.

Observers are awaiting the Bank of Canada’s stance on inflation measures, particularly the core indicators. Mendes emphasized the importance of a comprehensive approach to inflation indicators and warned that a failure to acknowledge progress in addressing inflationary pressures could signal a hawkish stance from the central bank.