Bank of Canada expects to stabilize interest rates on Wednesday as the economy beats

Canada’s GDP grew at 2.2% in the first quarter of this year, matching the last quarter of 2024 and defied expectations for tariff-driven economic stalls.

According to Statistics Canada, this increase is driven by increased imports and exports, especially products affected by tariffs such as automobiles, oil and gas, industrial machinery, equipment and parts.

But this has left some economists concerned that strong headlines are driven by pre-promotional raves and may hide more worrying economic trends as customers rush orders before expected price increases. For example, manufacturing, utilities, residential construction, household spending and household savings are all falling.

Violation expectation

Before the latest GDP report, nearly all major Canadian financial institutions bet on lower tax rates in June. Now, many people have to go back to those forecasts.

In fact, about a month ago, BMO, CIBC, National Bank and RBC predicted a 25 basis point cut in June, and TD took a step further, suggesting we can reduce another 50 BPS. TD has since modified this prospect.

Among the country’s major financial institutions, only Scotiabank predicts interest rates have not changed, and at least at the meeting this week, others seem to have shared the rate.

Why BOCs may wait longer

In the title “Canadian banks should not cutDerek Holt of Scotia believes that the potential inflationary pressure is still too long to prove further relief.

“If anything, the BOC should never be cut as soon as possible,” Hallt wrote.

He added that inflation data in April were hotter than banks’ own forecasts. “Despite relaxed modesty, other forces still keep core inflation at a sticky, elevated level,” he noted.

Now, following a much higher-than-expected GDP report, other major banks are now echoing Holt’s prospects for more cautiousness.

“The key here is that there are no obvious distress signals in 2025 so far,” BMO chief economist Douglas Porter wrote in an update after the GDP announcement. “With this solid set of results, we have officially abandoned the call for a tax cut next week and are now looking for the next tax rate pruning in the late July decision for eight weeks.”

Porter believes that strong GDP readings may reflect overly pessimistic views on the Canadian economy and overestimate the impact on tariffs. He suggested that despite the beatings of stocks early this year, they rebounded quickly. After the tariff announcement, business and consumer sentiment also appears to be recovering after it becomes sour.

If the market does overestimate the impact of the trade war, and the economy remains relatively stable and the core inflation rate is relatively high, then Canadian banks may not lower interest rates as aggressively or rapidly as most people expect.

“All of this adds up to a smaller demand for monetary policies that support the economy,” Porter wrote. “Rising core inflation to more than 3% will make banks more cautious, suggesting that the decision (this week) will keep interest rates stable. We continue to believe that this is not the end point for lowering tax rates, but we have officially delayed the time for these decorations to restart in late July and possibly extending to the next year.”

As of Friday, the bond market pricing had only had an opportunity to lower the tax rate by 32% at the June meeting, suggesting a consensus on holdings. However, expectations for July remain high, with the market allocating a 75% chance of a 25 barrel cut.

BOC policy interest rates predict 6 major banks

Here are where Canada’s big banks are currently ahead of the week’s interest rate decisions – now, most banks are heading for expectations, as GDP data is stronger than expected.