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The Bank of Canada now has more reason to pull the trigger on a rate cut when it meets next week following the release of Q1 GDP data.

Data released by Statistics Canada on Friday showed Canada’s economy was flat in March, resulting in slower-than-expected overall growth in the first quarter of 1.7%.

That was less than the 2% economists expected and follows a downward revision to Q4 growth to just 0.1% from 1%.

Despite the flat reading in March, StatCan said advance information points to a rebound in GDP growth in April of 0.3%.

"While the downside surprise in Q1 was driven by a big cut in business inventories, the reality is that underlying growth remains well short of potential, and slack is building for the overall economy," noted BMO chief economist Douglas Porter.

A large drawdown in inventories in the quarter subtracted 1.5% from the quarterly print, while consumer spending was better than expected at 3.0%.

The report also revealed an increase in the household savings rate to 6.9%, its highest level in two years. 

What the figures mean for the Bank of Canada’s next rate decision

Overall, economic growth is "sluggish,” says CIBC’s Katherine Judge, and well below the Bank of Canada’s own Monetary Policy Report forecast for Q1 growth of 2.8%.

"Activity looks even more sluggish when accounting for population growth, as the surge in domestic demand looks to be a one-off in the broader trend of weak readings seen last year," she wrote. "Policymakers are therefore on track to deliver the first dose of interest rate relief at next week's meeting."

BMO’s Porter agrees that the BoC will soon need to respond as "slack is building for the overall economy.:

"For the Bank of Canada, we believe the main message is that the output gap is widening, as reinforced by a less-tight job market, modestly increasing the chances of a rate cut next week," he wrote. "There are respectable arguments on both sides of the decision, but we believe the balance of evidence points to a cut—we've been calling for a June cut since late last year and will stand by that call."

However, not everyone is convinced the Bank of Canada will cut rates next week.

TD's James Orlando points out that the BoC hasn’t yet made any signals on its intention to make a move.

"This central bank has prided itself on communicating its intentions to make changes to monetary policy ahead of an actual move," he wrote.

"If it wants to keep up this effort of transparency and forward guidance, we expect the BoC will hold rates steady next week and use the meeting to tee-up a rate cut in July," he added. "That said, expect fireworks as the BoC could go either way with this one."

The Bank of Canada’s upcoming rate decision is on June 5, 2024.