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Though economic activity has been an a winning streak, that doesn’t mean the Bank of Canada will raise its key interest rate any time soon.Sean Kilpatrick/The Canadian Press

The Bank of Canada is expected to leave its key interest rate unchanged this week, but its outlook will grip observers as the pile of upbeat economic news becomes hard to ignore.

The central bank will release its monetary policy statement on Wednesday. It has left its overnight rate parked at just 0.5 per cent since mid-2015, after cutting the rate twice earlier that year in response to falling crude oil prices.

But the economic backdrop has been improving noticeably this year. Oil is above $50 (U.S.) a barrel and recent economic reports have been surprisingly strong, which suggests that the Bank of Canada's tilt toward caution and low rates could be nearing an end.

"Canada may have started the year with more slack than its southern neighbor, but the differential is closing swiftly," James Marple, an economist at Toronto-Dominion Bank, said in a note.

The latest good news: Employment figures for March beat expectations with a gain of 19,400 jobs. Although the unemployment rate ticked higher, to 6.7 per cent, economists believe the rise was due to optimists joining the labour market.

Adding to gains from previous months, employment growth now totals an impressive 276,000 over the past year, with even oil-sensitive Alberta contributing to the gains.

Economic activity has also been on a winning streak. Following a strong showing in January, monthly real gross domestic product (which takes inflation into account), has been rising at a 4-per-cent annualized clip over the past six months.

That marks the fastest period of growth in about seven years, and stands as a formidable challenge to any arguments that portray the economy as weak.

"With labour market conditions tightening, with GDP growth above potential and with home prices surging, we think it is time for the Bank of Canada to acknowledge that the economy is doing better than expected, perhaps as soon as [this] week," Stéfane Marion, National Bank's chief economist and strategist, said in a note.

But that doesn't mean the Bank of Canada will raise its key interest rate any time soon.

According to Bloomberg, the chances of a rate hike this week are essentially zero, and the chances of a rate hike remain very low through the summer. Recent notes from economists come to a similar conclusion.

The reason: While the economy is clearly doing better, the Bank of Canada will want to see more signs that the improvements are sustainable.

After all, the economy still isn't firing on all cylinders. Last week, Statistics Canada reported that the value of exports in February fell 2.4 per cent. The decline surprised economists and raised the prospect that economic momentum could be sputtering.

As well, business investment looks weak after tumbling 15 per cent in the fourth quarter. As recently as March, the Bank of Canada's deputy governor, Lawrence Schembri, noted that the decline implies it "is still too early to assume that the worst is behind us."

Mr. Marple believes that policy makers are worried that Canadian economic growth is on a wobbly foundation.

"Canada has seen false starts before – economic growth started last year with similar spark," he said in a note.

Benjamin Reitzes, an economist at BMO Nesbitt Burns, expects that the Bank of Canada this week will accentuate the downside risks to the economy, leaving it sounding dovish on monetary policy until July. This approach should hold down the Canadian dollar and bond yields – both good moves for the economy.

"Even so, the data have clearly turned more positive, and the Bank will have no choice but to upgrade their GDP growth forecast materially," Mr. Reitzes said in a note.

David Madani, an economist at Capital Economics, is skeptical on the economy. He points to the fact that housing-related industries – such as finance and construction – have been contributing to employment gains over the past six months. However, these gains look unsustainable given the imbalanced housing market.

Nonetheless, he'll be watching closely this week for a change in tone from the central bank.

"While we have our doubts about the sustainability of the recent pickup in economic growth and employment, [Friday's employment report] will make it harder for the Bank of Canada to defend its dovishness on the economy and the need to keep interest rates low in the near future," Mr. Madani said in a note.

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