BoC outlook survey suggests optimism from businesses

Expectations the Bank of Canada will raise its key interest rate target next month were bolstered Friday after stronger-thanexpected economic growth in April and a report suggesting widespread business optimism.

The Bank of Canada’s outlook survey indicator climbed to its highest level since the second quarter of 2011 as responses to most survey questions were above their historical averages.

However, the central bank noted almost all of the interviews with firms for the business survey were done before the U.S. announcement on tariffs on steel and aluminum imports from Canada.

Escalating trade tensions between Canada and the U.S., including the threats of additional tariffs on the auto sector, have raised concerns for the economy.

Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, said the solid increase in the outlook survey indicator shows the economy was in good shape heading into the tariff strife.

“With governor Poloz saying that the bank will not be shaping policy based on headlines, and the economic backdrop in generally good shape, there’s a solid case for a July rate hike,” Reitzes wrote in a report.

“Even so, we’ll be waiting to see if Trump reacts to Canada’s retaliatory tariffs, as a further escalation could drastically change policy dynamics.”

The Bank of Canada survey came as Statistics Canada reported Friday real gross domestic product edged up 0.1 per cent in April over the previous month, topping the expectations of economists for no change for the month.

Gains in the manufacturing and utilities sectors more than offset declines in construction and in mining, quarrying, and oil and gas extraction to help the output of goods-producing industries rise 0.2 per cent.

Activity in the manufacturing sector rose 0.8 per cent in April as the output of both durable and nondurable manufacturing grew.

Services-producing industries were essentially unchanged overall for the month.

Both the business outlook survey and the reading on GDP will be scrutinized by the central bank ahead of its interest rate decision next month.

The Bank of Canada kept its key interest rate target on hold at its last rate announcement, but the central bank’s accompanying statement was interpreted by many economists as suggesting that rates could head higher later this year.

Bank of Canada governor Stephen Poloz said earlier this week the escalating cross-border trade fight and new mortgage rules will “figure prominently” in the central bank’s upcoming interest-rate decision.