Canada’s economy appears to be stronger than previously expected, leading RBC economists to believe that the Bank of Canada (BoC) will hold interest rates steady in March—unless tariff concerns shake investor confidence.
In a note to investors, RBC assistant chief economist Nathan Janzen pointed to resilient consumer spending and stronger labor market data, which suggest the BoC may pause further rate cuts.
“Canadian gross domestic product will be in focus after firmer labour market reports in December and January, and an upside headline inflation surprise increased the odds that the Bank of Canada will forego another rate cut in March,” Janzen explained.
RBC economists now expect real GDP growth to hit 1.5% for Q4 2024, driven by household spending. Consumer spending is forecasted to rise 3% for Q4, the largest increase since Q3 2021, despite higher interest rates.
- Household spending surge: Consumers continue to spend at a rapid pace.
- Housing market recovery: Residential investment is rebounding as home sales pick up.
- Inflation remains strong: Consumer demand is offsetting supply pressures.
However, there are some weak spots in the economy. Janzen highlighted that business investment plans for 2025 remain negative, particularly in machinery and equipment, which are crucial for productivity gains. Additionally, hours worked declined by 0.2% in Q4, marking the first drop of 2024.
Recent inflation acceleration, while often seen as a negative, is being viewed as a sign of consumer resilience. RBC also noted that the GST/HST holiday temporarily distorted CPI data, meaning households may be consuming even more than official figures suggest.
Last month, the BoC cut rates in anticipation of potential U.S. tariffs, a move that now appears excessive given the recent economic data.
“The potential for significant tariff hikes remains a downside risk to economic growth and the interest rate outlook,” Janzen noted. “But absent a trade shock, economic data is suggesting Canada’s economy may be faring better than initially feared.”
With inflation holding firm and consumers still spending, the Bank of Canada is likely to keep rates unchanged in March—its first hold since June 2024.