By BDC
MONTREAL, Canada – Incoming data has been encouraging with inflation standing just inside the Bank of Canada’s target range at 2.8 percent in February.
Economic growth in the fourth quarter of 2023 and the first two months of 2024 was better than expected, but recent employment figures indicate growing slack in the labour market with unemployment reaching 6.1 percent in March.
A faster-than-expected slowdown in employment in combination with easing inflation should prompt the Bank of Canada to begin cutting rates this summer. We reiterate that we expect the Bank of Canada to start lowering interest rates around June this year, and bringing them down to closer to 4.25 percent or 4 percent by year-end.
The loonie stabilizes in March
The Canadian dollar was stable in March, averaging US$0.74, the same level as the previous month. The long-term outlook continues to be muted for the Canadian dollar, with some downside risk.
The Bank of Canada is likely to cut rates earlier and probably faster than the US Federal Reserve. The yield differentials would drive the exchange rate to the lower bound of our expectations for this year. We expect the exchange rate to fluctuate between US$0.72 and US$0.75.
Business leaders remain optimistic in March
The CFIB’s confidence index for the year ahead remained above the critical 50 mark for a second consecutive month. Optimism decreased slightly from 54.9 to 52.7 between February and March, with confidence levels mixed on the by-sector level. Some sectors such as the retail and financial services sectors showed less optimism, while others, such as transportation and professional services, gained some optimism.
All provinces registered a gain in confidence; however, Quebec and New Brunswick remain below the 50 mark while Nova Scotia stands out as the most confident province with an index at 59.3.
