Poor Q1 GDP Data Implications for The Bank of Canada, Notes Scotiabank

11:59 AM EDT, 06/01/2026 (MT Newswires) -- Friday's Q1 gross domestic product figures in Canada, including revisions, stunned everyone in consensus and at the Bank of Canada, said Scotiabank.

Consensus had forecast about 1.5% quarter-over-quarter seasonally adjusted annual rate (SAAR) growth with a trimmed range between about 1% to 2% and the BoC's projection in the April Monetary Policy Report was 1.5%, noted the bank. Instead, GDP was basically unchanged at 0.1% quarter-over-quarter SAAR decline. There were also negative revisions.

Markets reacted to the readings by edging cumulative pricing for rate adjustments this year to just a 25bps hike by year-end, with much of a hike starting to be priced in September and October BoC meetings, stated Scotiabank. Markets foresee about 50bps of cumulative hikes into 2027.

The BoC will likely lean on the argument that GDP figures point to somewhat more slack than anticipated by the central bank and everyone else, as growth underperforms potential GDP growth that is likely around 1%, added Scotiabank. This will give the BoC more room to assess forward-looking developments like the impact of the broadly based surge in commodities upon growth and inflation, plus ongoing additions to fiscal policy contributions to growth.

Scotiabank is still of the view that the BoC will hike this year. The bank previously had a Q3 tightening of 50bps and then +25bps in Q4 before stopping at 3%. Scotiabank leans toward reversing that pattern with hikes no earlier than September into Q4. The BoC's job is inflation control and that has a multitude of drivers.

Regardless, Scotiabank stands by its record versus consensus since the bank shifted to projected hikes by late 2026 in last November's forecast, while everyone else was talking cuts.

Judging by the inflation-adjusted policy rate, the BoC has been passively taking out stimulus by looking through expected inflation resulting from pre-war and wartime influences on inflation risk. The real policy rate has dropped sharply, according to the bank. It would be policy error to add to this by cutting the nominal policy rate.

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