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Growth in Canada should lead in the first quarter of the year, but the Bank of Canada is unlikely to prompt a rate hike

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Maria Gill
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Canada’s economy grew at a 3.1% annual rate in the first quarter, below analyst expectations of 5.4%, but in line with the Bank of Canada’s forecast of 3.0%, according to Statistics Canada data.

Real GDP is likely to rise 0.2% in April, according to preliminary data, as the decline in home resale activity was offset by gains in the mining and oil and gas sectors. March GDP rose 0.7%, beating expectations of 0.5%.

“It was weaker than expected in the first quarter, but domestic demand was very strong,” said Andrew Kelvin, chief strategist for Canada at TD Securities. “This speaks to a reasonable underlying momentum in the economy from the first quarter through the second quarter.”

“We continue to have very strong inflation expectations. For at least the next two meetings, the Bank of Canada should consider a significant rate hike,” Kelvin added.

The Bank of Canada is widely expected to raise its key interest rate from 1.0% to 1.5% in its decision on Wednesday. The central bank said it would act decisively to control inflation, which reached 6.8 percent in April, the highest level in three decades.

“Today’s data failed consensus expectations, but that should not alter the Bank of Canada’s plans for a 50 basis point rate hike tomorrow,” said Royce Mendes, Desjardins Group Head of Macro Strategy, Bonds.

“The economy is too overheated and the rate of policy is still too low. It’s time to normalize monetary policy.”

Quarterly growth slowed from the previous two quarters due to a 2.4% drop in international export volume, according to Statscan.

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But domestic demand rose more than in the previous quarter and household spending rose, with spending on goods at a five-year high, excluding pandemic-related momentum in the third quarter of 2020.

Employee compensation also rose 3.8%, the largest quarterly increase since 1981, excluding the pandemic-related swing, and a 2.0% increase in the fourth quarter of 2021.

The Canadian dollar was trading 0.2% lower at 1.2682 per dollar, or 78.85 US cents.

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