Some consumers, businesses are feeling more optimistic about the economy, say BoC surveys

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 on Monday released its business outlook and consumer expectations surveys, 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.

Economists expect rate cuts to start mid-year

After a historic run-up in inflation post-pandemic, the Bank of Canada responded with rapid interest rate hikes that boosted its key interest rate target to five per cent — the highest it's been since 2001.

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

WATCH | Has the Bank of Canada accomplished its goals?:

Inflation’s down. So where are the interest rate cuts?

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Duration 4:14

After two years of aggressive interest rate hikes, inflation is seemingly back under control, causing many Canadians to start asking: Where’s the relief? CBC’s Peter Armstrong looks at whether the Bank of Canada has accomplished its goals and what we know about when rates could start to come back down.

Canada's annual inflation rate fell to 2.8 per cent 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.

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