The Canadian economy was seen rising 0.4% on the month in the month of February, data from Statistics Canada showed last week. The better than expected GDP growth signaled that the first quarter growth outperformed the BoC's forecast for the same period. The GDP growth was seen to be better than the forecasts which estimated that GDP growth increased 0.3% on the month.

On an annualized basis, the first quarter GDP growth for Canada was higher than the estimated 1.6% increase even if the monthly GDP report had shown a flat change. The Bank of Canada forecast that first-quarter GDP growth would rise 1.3%.

(Click on image to enlarge)

Canada GDP Growth Rate: 0.4%, m/m (Source: Tradingeconomics.com)

The central bank was seen raising interest rates three times in a row since July last year amid an uptick in business activity and faster than expected increase in inflation. The BoC had left interest rates unchanged at the meeting last month but left the door open to further rate hikes which would be data dependent.

The GDP data showed that that good producing sector had advanced 1.2% with a pickup in mining, oil and gas adding to the gains. Previously the sector had declined following unscheduled maintenance shutdowns.

Extraction from the oil sands was seen rising as production advanced 3% after a flat reading in February. Nearly fifteen out of the 20 industrial sectors noted higher activity in February.

The increase in the GDP showed broad-based advances in key sectors that included manufacturing. The Canadian economy was experiencing a slowdown in the second half of last year but the recent data suggested that growth will advance above the BoC's 2% forecast in the coming months.

The better than expected GDP data also suggests that the Bank of Canada would continue with its rate hike that it had signaled just last month. The central bank forecast that the first quarter GDP growth would advance 1.3% while the second quarter GDP is expected to accelerate to 2.5% and average at a pace of 2.0% for the year 2018.

The Canadian economy was seen bouncing back after a weak report in January following a disruption in railroad and shutdowns that affected the auto sectors as well.

Manufacturing activity was seen rising 1% with gains led by automobile production. Home building activity also advanced to push the construction activity higher to 0.7% on the year. Real estate continued to remain a drag on the economy. This was largely due to strict mortgage rules that went into effect since the start of the year. Activity measured by the real estate agents and brokers were seen falling 7.9% on the year in February and extended the 12.9% declines from January.

The Bank of Canada Governor Stephen Poloz was seen speaking later in the day on Tuesday, following the release of the GDP report. The central bank governor spoke later in the day. He struck a very cautious tone on interest rate hikes despite a pickup in the GDP and unemployment.

Speaking at an event, the BoC governor highlighted a number of reasons for the central bank to take a cautious approach to rate hikes. Much of his speech was centered on household debt. The markets viewed this as a way for Poloz to warn households about higher borrowing costs.

The BoC is expected to hold its next monetary policy meeting in the month of May. The central bank is likely to keep monetary policy unchanged at this month’s meeting but there is potential for the BoC to hike rates as early as the June BoC meeting.

With the recent headwinds concerning trade with the U.S dissipating, the central bank which has previously cited these terms as a concern is likely to push forth with at least two more rate hikes this year.