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Bank of Canada looks set to cut rates next week on signs inflation tide turning

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Investing.com — Bets on the Bank of Canada pivoting to rate cuts next week received a major boost as data showing a significant dent to the economy and inflation suggests that higher rates are no longer needed.

“All ducks appear to be in a row for the Bank of Canada to kick-start the policy easing cycle and lower the overnight rate by 25 basis points to 4.75% on Wednesday,” RBC said in Friday note.

Money markets are now pricing in an 80% chance the BoC will move cut rates on Jun. 5, according to data from LSEG.

The increased bets on a June rate cut were boosted by data Friday showing Canadian GDP unexpectedly to 1.7% in Q1, while the Q4 print of 1% was sharply revised lower to 0.1%. 

But not everyone is so sure. 

A deeper dive into Friday’s GDP data showed several signs of underlying growth, ScotiaBank Economics said in a Friday note, “not least of which that growth in consumer spending is at its strongest in years and needs no help from rate cuts.”

Final domestic demand, which is a cleaner gauge of underlying momentum in the economy, Scotiabank says, was up by 2.9% sequentially seasonally adjusted annual rate in Q1.

“That was the strongest growth in final domestic demand that Canada has seen since 2022 Q1,” it added.

RBC, however, believes the slowing economic backdrop is “raising confidence that lower inflation readings will continue despite signs of a reacceleration in the stronger U.S. economy.” 

At the prior meeting in April, BoC Governor Tiff Macklem laid out the carpet for a rate cut, noting that the requirements for rate cut appeared to be in place but needed to see more evidence on slowing inflation. 

The two CPI reports since the April meeting that both surprised on the downside should “provide the BoC with enough evidence,” RBC said. 

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