Money markets are pricing in modest – but not insignificant – odds of renewed Bank of Canada interest rate cuts this year in the wake of this morning’s weaker-than-expected GDP reading.
Markets are pricing in close to a 40% probability of a quarter-point rate cut by the Bank of Canada’s July 15 policy meeting, according to overnight index swaps data tracked by Bloomberg.
The Bank of Canada’s current overnight rate is 2.25%. While the bank only moves the overnight rate in quarter-point increments, markets price in a much less rigid rate when setting bets on future policy rates. Right now, traders are positioned for an overnight rate of 2.188% in July and 2.170% by September.
At the start of this year, traders had been pricing in modest odds of a rate hike by the end of this year. However, those bets came off the table as recent economic data showed a Canadian economy that’s still struggling while uncertainty over tariffs rages on.
Canada’s economy contracted in the fourth quarter, coming way below expectations, as manufacturers heavily dipped into inventories to meet demand instead of producing fresh goods. Gross domestic product contracted at an annualized pace of 0.6% in the October-December quarter, Statistics Canada said, compared with a revised 2.4% increase in the prior quarter. Analysts as well as the Bank of Canada had forecast GDP to be flat in Q4.
However, there were some details of the GDP report that provided encouragement for the future path of the economy.
The Canadian dollar was little changed after the 830 am ET data, up 0.04% to 73.14 U.S. cents. Yields on the two-year government bond were down 1.7 basis points to 2.209%, similar to where they stood before the data release.
Here’s how economists are reacting:
Maria Solovieva, economist, TD Economics
“For 2025 as a whole, the economy slowed to a 1.7%, primarily due to lower exports to the United States. That said, domestic demand grew at a better 2.3% pace, supported by stronger government spending. The rebound in consumption and the return of non-residential investment in the fourth quarter provide some reassurance that underlying demand is stabilizing.
Still, today’s report is weaker than the Bank of Canada’s January projections for a flat reading, reinforcing their view that momentum remains limited. There is still evidence of labour market slack and inflation gradually moderating. Taken together, these dynamics suggest that the Bank of Canada will remain on the sidelines, and the policy rate at 2.25%.”
Derek Holt, vice-president, Scotiabank Economics
“So what would the Bank of Canada think overall? Q4 GDP of –0.6% was weaker than their January MPR forecast (0%) but when disappointment is due to things like inventories while final domestic demand is strong they tend to fade it. They’ll want to see how Q1 evolves but so far they’re probably pretty happy about the preliminary evidence.
In short, the BoC is very likely to retain its patient messaging. It was likely to do that regardless of this morning’s numbers in any event since it is focused upon long-tailed developments across supply and demand channels that only time and a lot of data will inform pending material further information on things like trade negotiations that will take a long time to unfold.”
David Rosenberg, founder and president of Rosenberg Research
“The good news is that the monthly December number for real GDP did beat expectations, coming in at +0.2% MoM instead of +0.1% as was widely expected. And a solid ‘point two’ at that, coming in at +0.24% to the second decimal place. While there was widespread strength across many categories, what did emerge as sources of concern were very weak results for some areas very closely tied to the consumer: air travel was down -0.4%, and there were flat readings in real estate, restaurants/accommodation, and the retail sector.
Statistics Canada is penciling in zero growth for January, which tainted the positive “hand off” from December’s momentum and likely means that Q1 real GDP growth would do well to even achieve a +1.0% annual rate. That, in turn, would take the YoY real GDP trend down even further to less than +0.5%. Remember, the Bank of Canada’s estimate of potential GDP growth for this year is +1.1%, so barring a turnaround, we are talking about more spare capacity and more disinflation pressure coming our way. It is against that backdrop that we remain steadfast in the view that time is not on the Bank’s side when it comes to twiddling its thumbs on the sidelines.
This economy needs help, and the fact that the Bank of Canada has been pushing on the proverbial string since it first embarked on its easing course back in the spring of 2024 only means that it has used up more of the policy bullets left in the chamber. Not to mention the fact that the Bank’s most recent projection of a +1.8% annual rate for real GDP now looks to be very stale and out-of-date at this point.”
Douglas Porter, chief economist, BMO Capital Markets
“The Q4 setback in GDP was entirely due to a drop in inventories and doesn’t reflect underlying momentum, although at just +0.7% y/y growth since the end of 2024, the economy is hardly thriving. The solid underlying details on Q4 likely offset the miss on headline growth for the Bank of Canada (it had assumed 0.0 for Q4). The Bank is upbeat on Q1 at 1.8% (we had been at 1.6%), which could be a bit of a stretch, given that growth around the turn of the year remains mediocre as tariffs and trade uncertainty continue to weigh heavily. Until that uncertainty clears, the economy will likely continue to struggle. We look for GDP growth this year to come in just a bit better than 1%, although perhaps less choppy than 2025’s see-saw pattern. Such mild growth does keep the door slightly ajar to the possibility of BoC rate cuts, but we’re not there quite yet.”
Stephen Brown, Deputy Chief North America Economist, Capital Economics
“The 0.6% annualised decline in fourth-quarter GDP was not as bad as it looked, with most of the drag coming from weaker inventory building, whereas domestic demand growth rebounded to more than 2%. The latest flash monthly GDP estimate for January was also disappointing, but that was probably partly weather related. Accordingly, while GDP is on track to underperform the Bank of Canada’s expectations again this quarter, the probability of renewed interest rate cuts has risen only marginally.”
Andrew Grantham, senior economist, CIBC
“Even with a stronger than expected handoff from December, Q1 GDP is still tracking only around 1% (assuming modest growth rates in February and March), which would be below the Bank of Canada’s MPR forecast of 1.8%. While the Bank has suggested that weak GDP readings are largely the result of structural rather than cyclical factors, that explanation will be harder to sell if progress on reducing unemployment stalls or reverses. Overall, though, the more positive composition of Q4 GDP and solid December reading make today’s data good enough for policymakers to maintain their current on-hold stance.”
Michael Davenport, senior Canada economist at Oxford Economics
“We think Canada will narrowly avoid a recession, as GDP grows modestly in Q1. Still, soft economic momentum will persist in the near term, due to US tariffs, elevated trade policy uncertainty, and a shrinking population. This will keep recession risks elevated. Growth should get a mid-year boost as the new federal groceries and essentials benefit is spent and other major fiscal stimulus measures begin to support the economy. We also expect a recovery in non-residential investment and exports to support stronger growth in H2 and 2027, but that hinges on successful renegotiation of the USMCA by mid-year.”
Gisela Young and Veronica Clark, economists at Citi
“The weakness in Q4 GDP was from the drawdown in inventories which subtracted 4.2 percentage points from growth. But underlying growth was stronger than we expected with final domestic demand growing by 2.4% QoQ Seasonally Adjusted Annual Rate. This GDP print likely on the margin makes BoC officials more comfortable with the current level of policy rates in the near term but we still expect further rate cuts this year.”
Matthieu Arseneau and Alexandra Ducharme, economists at National Bank
“Overall, this morning’s report is not as worrying as it might seem at first glance. Despite weaknesses in residential and non-residential structural investment, domestic private demand rebounded by 1.2% in Q4 thanks to decent consumption growth. This is all the more convincing given that this rebound comes despite a contraction in the population. Overall, GDP per capita was decent by avoiding a contraction, while private domestic demand per capita managed to record good growth. Even though economic growth is below the Bank of Canada’s forecast, we believe that the details may reassure it somewhat about its fears of expanding excess capacity in the economy. What’s more, we note that another gauge of inflation faced by households is showing more worrying signs than the CPI. The consumer price deflator excluding energy and food is rising at a rate of 2.9% year-over-year (3.3% annualized in the quarter), compared to 2.5% for the CPI. This should therefore not radically change its view on the appropriate interest rate level for the economy at this time.”
Royce Mendes, head of macro strategy, Desjardins
“While underlying momentum in the economy can’t be characterized as consistently strong, it’s not weak enough for the Bank of Canada to cut rates any further. The economy still has many hurdles to pass in the first half of this year, so there’s still a chance that central bankers might be forced back into action. But, for now, it looks like they’ll be satisfied remaining spectators.”
Dominique Lapointe, director, macro strategy, for Manulife Investment Management
“While the Q4/2025 headline surprised to the downside, we note that the Q2/2025 contraction was revised higher, from -1.8% QoQ AR to -0.9%. Therefore, the level of real GDP in Q4 was virtually the same as it would have been as forecasted, without revisions. From the BoC’s perspective, this leaves the output gap largely unchanged (albeit negative) and does not open the door to additional rate cuts. Looking ahead, we forecast stable growth at around 1.0-1.5% for 2026, with trade uncertainty heavily weighing on economic conditions.”