Economists Join Traders as Bets on Canada Interest-Rate Cut Fall

Economists at Bank of Montreal and Royal Bank of Canada are reversing their expectations for an interest-rate cut by the Bank of Canada next week, aligning with market sentiment that now prices in only a small chance of easing; this shift follows stronger-than-expected Canadian GDP growth for the first quarter, which drove the Canadian dollar up 0.5% to 1.3740 against the US dollar.

Analysis

Economists, notably from Bank of Montreal and Royal Bank of Canada, are retracting their forecasts for a Bank of Canada interest-rate cut next week, aligning with market sentiment which now prices in a minimal probability of such easing. This significant reassessment is primarily driven by Canada's first-quarter gross domestic product (GDP) growth, which surpassed all estimates and accelerated compared to the end of 2024. The stronger-than-anticipated economic output immediately bolstered the Canadian dollar, causing it to appreciate by as much as 0.5% to 1.3740 per US dollar. The overall sentiment is strongly positive with a hawkish tone, reflecting the reduced expectation for monetary stimulus due to robust economic performance.

Key Decisions for Investors

• Investors should adjust expectations for Canadian monetary policy, as the likelihood of an imminent interest rate cut has substantially decreased following strong GDP data.
• Consider potential continued strength in the Canadian dollar (CAD) against the US dollar, supported by hawkish revisions to rate outlooks and positive economic surprises.
• Monitor upcoming communications from the Bank of Canada for confirmation of this less accommodative stance and further guidance on its policy trajectory.