A silhouetted businessman stands on top of a mountain peak and looks into the distance with a spyglass in front of a dramatic sunset in the distance

The Bank of Canada says business and consumer sentiment improved during the first quarter of the year, despite higher interest rates still putting a drag on the economy.

The central bank released its business outlook and consumer expectations surveys Monday, which showed increased optimism as people expect interest rate cuts are nearing.

Although firms still reported weak demand, indicators of business conditions, sales outlook and employment intentions improved after several quarters of decline.

“In the wake of weak past sales growth, expectations for improved sales are supported by population growth, efforts to enter new markets or develop new products and expectations that interest rates will decline over the next 12 months,” the Bank of Canada said.

Meanwhile, nearly two-thirds of Canadian consumers are cutting or postponing spending due to high inflation and interest rates.

Nevertheless, consumers are becoming less pessimistic about where the economy is headed as they expect interest rates to fall.

“Although weak, consumer sentiment improved this quarter, with people expecting lower interest rates,” the Bank of Canada said. “As a result, consumers are less pessimistic about the future of the economy and their financial situation, and fewer think they will need to further cut or postpone spending.”

Workers also continue to be optimistic about the job market and expect strong wage growth, despite signs of the labour market loosening.

After a historic run-up in inflation post-pandemic, the Bank of Canada responded with rapid interest rate hikes that brought up its key interest rate target to 5% — the highest it’s been since 2001.

Forecasters widely expect the central bank to begin lower its policy rate around the middle of the year as inflation continues to fall and economic growth remains weak.

Canada’s annual inflation rate fell to 2.8% in February.

The central bank surveys found that while businesses’ expectations for inflation in the near term continue to decline, consumers’ expectations have remained essentially unchanged.

“Consumers link their perceptions of slowing inflation with their own experiences of price changes for frequently purchased items, such as food and gas,” the central bank said.

Higher interest rates have slowed economic growth as consumers have pulled back on spending and firms seen their sales slow. Real gross domestic product grew at an annualized rate of 1% in the fourth quarter.

However, the economy has managed to avert a recession and is expected to rebound in the second half of the year as interest rates fall.

The business outlook survey showed fewer firms were planning for a recession in the first quarter than in the fourth quarter.

The Bank of Canada is scheduled to make its next interest rate announcement on April 10.

Additionally, Canada looks set to dodge a recession despite the ongoing downward pressure from higher interest rates, Deloitte Canada said in its economic outlook report.

A number of worrisome trends are still weighing on the economy, Deloitte said, including sticky inflation, rising business insolvencies and increasing mortgage delinquencies.

“Against this backdrop, we remain cautious about the near-term outlook,” the firm said in its report.

“But based on its current trajectory, Canada appears likely to skirt a recession and even seems poised to begin recovering from its current slump in the second half of this year.”