With gross domestic product (GDP) figures for the Canadian economy set to be released this week, one strategist said the data could be crucial for the Bank of Canada as it decides whether to raise interest rates or not.

Benjamin Reitzes, a managing director of Canadian rates and macro strategist at BMO Capital Markets, said in a report released last week that the central bank’s June 7 policy rate decision could hinge on the GDP report.

A key reason, according to Reitzes, is that May employment data is not scheduled to be released until after the central bank’s rate decision. As a result, he said there will be “notably more data in hand, with another two job reports and the CPI [consumer price index],” for the following interest rate announcement on July 12. 

Statistics Canada is scheduled to release GDP data for the first quarter of 2023 on Wednesday. 

Canada’s central bank elected to hold interest rates at 4.5 per cent at its two most recent rate decisions, following an aggressive hiking campaign that started in March of last year. 

Reitzes said that he expects the upcoming GDP data to be similar to the Bank of Canada predictions.

“We’re looking for first quarter GDP to climb 2.5 per cent annualized…but policymakers are anticipating a slowdown through the rest of the year, and firmer March and April readings would not be consistent with a slowing economy,” he said in the report.  

Reitzes said higher-than-expected inflation data released on May 16 spurred sentiment for another interest rate hike, “but we don’t believe the case is sufficiently compelling to prompt another push higher just yet.” 

“The March/ first quarter GDP report has the potential to change that dynamic. The flash estimate for March GDP came in at -0.1 per cent, continuing the decelerating trend through the first quarter,” he said. 

Inflation rose to 4.4 per cent year-over-year in April, according to Statistics Canada.

Despite April’s inflation figures, headline inflation is expected to ease to three per cent partway through the year, in accordance with Bank of Canada projections said Reitzes. 

Additionally, Reitzes said that April GDP figures are not expected to be “any better” than March, as public sector strikes could take a toll, “potentially driving another negative reading.”

“It’s going to be awfully difficult to hike rates following back-to-back negative GDP prints,” he said.

“However, if March is revised into positive territory, and the economy managed to muster enough momentum to push April GDP higher, then the Bank of Canada would be faced with a much firmer economic backdrop than anticipated.”