Canada's economic growth misses estimates, boosting chances of rate cut

By Promit Mukherjee and Ismail Shakil

OTTAWA (Reuters) -Canada's economy likely weakened in the first quarter, data from Statistics Canada showed on Tuesday, bolstering expectations that the Canadian central bank would have more reason to cut interest rates in June.

Canada's gross domestic product (GDP) rose 0.2% in February, less than analysts' estimates, while growth in March likely remained muted, Statistics Canada said.

The economic slowdown combined with cooling inflation could add to the evidence the Bank of Canada (BoC) is looking for to start lowering its key interest rate from nearly a 23-year high of 5%.

The loss of economic momentum into the quarter "puts additional pressure on the BoC to begin cutting as soon as June," said Benjamin Reitzes, managing director and Canadian rates and macro strategist at BMO Capital Markets.

Analysts polled by Reuters had forecast 0.3% GDP growth in the month.

In a preliminary estimate for March, Statscan said GDP was likely unchanged from February as increases in the utilities and real estate, rental and leasing categories were offset by decreases in manufacturing and retail trade.

Growth in January was downwardly revised to 0.5% from 0.6%, it said, and considering March estimates, the economy is likely to have expanded at a 2.5% annualized rate in the first quarter, the fastest growth rate since the first quarter of 2023.

The monthly GDP report is based on Canada's industrial output while quarterly figures, which will be released next month, are based on an alternate calculation.

The BoC expects growth in the first quarter of 2.8% and 1.5% in the second quarter, it had said in its last monetary policy report earlier this month.

Economic growth stalled in the second half of last year and the rebound in January had eased pressure on the central bank to lower rates to avoid a downturn. The chances of a first rate cut happening any time soon were further complicated by strong U.S. data, which has pushed chances of a rate cut by the Federal Reserve deep into the second half.

"We continue to see the Bank of Canada beginning a rate cutting cycle in June," Royce Mendes, head of macro strategy for Desjardins Group, wrote in a note.

Traders and economists had expected Canada's GDP to weaken as January's rebound was largely driven by one-off factors.

Money markets slightly increased the odds of a rate cut in June to close to 60% from 56% before the release of the data, while a cut in July is fully priced in.

The Canadian dollar slightly weakened after the GDP data, with the local currency trading 0.51% lower at C$1.3730 per dollar, or 72.89 U.S. cents. The yield on the two-year Canadian government bond rose 2.7 basis points to 4.427%.

The BoC, which had ratcheted up rates to curb a surge in prices, said earlier this month that a reduction in borrowing costs in June was possible if the recent cooling trend in inflation is sustained. Headline inflation came in at 2.9% in March, roughly in line with the central bank's expectations.

GDP growth in February was driven by a second consecutive monthly rise in the services-producing industries, Statscan said. Transportation and warehousing increased 1.4% in February, the largest monthly growth rate since January 2023, the agency said.

Overall, Canada's goods-producing sector was unchanged on a month-over-month basis, while the services sector posted a 0.2% increase.

(Additional reporting by Dale Smith; Editing by Louise Heavens and Paul Simao)