Q1 GDP Surprise Pushes BoC Rate-Cut Expectations to July, Not June

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Strong Q1 GDP Shakes Monetary Outlook

Canada’s economy kicked off the year in surprising strength—Q1 GDP rose at a 2.2% annualized rate, markedly exceeding analysts’ estimates of around 1.7% . Fuelled by stockpiling ahead of anticipated U.S. tariffs, Canada’s exports surged, reshaping how market watchers and the Bank of Canada view the timing of interest rate cuts.

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From June to July: Shift in Expectations

Before this, markets were betting on a rate cut as soon as June. But the Q1 GDP upswing tilted expectations toward a July move. Currency swap markets now reflect over 75–82% odds of holding rates steady through June, with a cut penciled in by July 30 .

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Core Inflation and Trade Headwinds Remain Concerns

Despite stable headline inflation at 1.7%, core inflation (trim and median) persists near 3%, the upper boundary of the BoC’s target . Adding to the caution, ongoing U.S. tariffs on Canadian exports are creating inflationary pressure as businesses pass on costs

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BoC’s Deliberate, Data-Driven Pause

The BoC signaled its cautious stance in June, owing to strong Q1 growth and stubborn inflation . Governor Tiff Macklem has noted that while early Q2 data suggests slowing economic momentum, the institution prefers to wait for clearer signals before cutting policy rates

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Slip in Domestic Consumption

While exports outperformed, the rise in GDP masked a worrying trend: final domestic demand fell by 0.1% in Q1—reflecting weak household spending and weak investment That gives the BoC room to ease later this summer if downward pressure on growth continues.

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Markets React: Loonie Firms, Yields Stabilize

After the GDP release, the Canadian dollar strengthened, nearing 71.5–72 cents USD—supported by reduced immediate rate-cut odds . Meanwhile, Canadian bond yields flattened, tracking U.S. Treasuries as boom-and-bust sentiment steadied.

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What It Means for Canadians

Borrowers & investors: Rate cuts are delayed but still likely. Homebuyers should hold their fixed or variable mortgage rates, while savers may remain with current yields.
Businesses: Exporters benefit from a firmer currency, but domestic companies face challenges from weak consumer spending.
Policymakers: The delicate path forward requires balancing slugging domestic demand against external price pressures.

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📈 Quick Summary Table

Q1 Q2 Indicator	Status/Change
Q1 GDP annualized growth	+2.2% (vs est. 1.7%)
Final domestic demand	−0.1% (revealed weak consumption)
Core inflation (trim/median)	~3% (top of BoC target range)
Rate cut odds in July	~75–82% probability
Likely cut timing	July 30 (post-June pause)

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On the Horizon

Keep an eye on:

• Q2 GDP data (late July)— for signs of sustained slowdown
• June inflation report— consistency in disinflation is key
• Trade & tariff updates— escalation may delay relief

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Final Word

The Q1 GDP shock makes a June rate cut unlikely, pushing expectations toward July. The BoC will stay patient, waiting for clear confirmation from growth, inflation, and trade developments. If signs of cooling emerge, modest easing could still happen this summer—but only after a deliberate pause.