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Bank of Canada Governor Stephen Poloz described the first-quarter economic performance as “atrocious.”CHRIS WATTIE/Reuters

In a world awash with fast-evolving economic predictions, the Bank of Canada's once-a-quarter outlook isn't usually relied on for timely and illuminating forecasts. But this week's Monetary Policy Report will contain perhaps the central bank's most important projections in years, at a deeply uncertain time when the markets have many unanswered questions about Canada's wobbly economy and the direction of monetary policy.

It's been three months since the Bank of Canada stunned markets in January with a quarter-percentage-point cut in its key interest rate, accompanied by a quarterly Monetary Policy Report that drastically reduced the bank's economic growth expectations for the first half of the year. The fact that the bank felt the damage from the oil shock was potentially severe enough to warrant the first rate cut in nearly six years was a harsh pill indeed; the financial markets almost immediately girded for a second cut.

But that belief has eroded dramatically in the intervening months, as the central bank adopted a wait-and-see approach while expressing optimism that the worst of the oil shock may already be past. The bank opted in its March rate decision to leave its key rate unchanged. As of the end of last week, the bond market was pricing in only about a 10-per-cent chance of a cut in the April rate decision, due this Wednesday morning. Nevertheless, traders still predict another cut is likely in the second half of the year.

That view, however, will hinge largely on the bank's new economic projections for 2015, which will be released in the quarterly MPR on Wednesday at the same time as the rate decision. These projections are certain to look significantly different from the January outlook, but just how different has been a topic of much speculation. The central bank has only dropped the occasional hint about how it believes the oil-rattled economy is evolving, while studiously avoiding providing any specifics about its economic growth expectations.

What we do know is that the bank believes the first quarter was substantially weaker than the 1.5-per-cent annualized growth rate it projected in the January outlook; indeed, Bank of Canada Governor Stephen Poloz even described the first-quarter economic performance as "atrocious."

However, the bank firmly believes that this weakness is evidence that more of the oil shock's impact hit the economy earlier than the bank had initially anticipated. As a result, we also know that the bank now expects the second quarter to be better than the first. And it has stuck to its guns that the economy will gain momentum in the second half of the year, as the oil shock fades in the rear-view mirror while non-energy exports accelerate.

Still, some economists believe that the economy actually contracted in the first quarter, and that the oil shock's impact will linger longer than the Bank of Canada has been banking on. Consequently, many feel the central bank will have to ratchet back its second-half growth expectations, which in January were contemplating an annualized growth pace of 2.5 per cent by the fourth quarter.

If they're right, this implies a lower and slower trajectory for Canadian interest rates over the next couple of years than the Bank of Canada has so far been suggesting. That would have ramifications for Canadian stocks and bonds, and would weigh further on the already battered Canadian dollar.

But there are still plenty of economists who feel another rate cut won't be necessary.

In a report last week, National Bank of Canada chief economist Stéfane Marion argued that the oil shock has largely been a one-industry event in an otherwise fairly stable Canadian landscape, and therefore isn't the kind of widespread economic "tsunami" that would justify deeper rate cuts.

"Why cut rates in this type of environment, especially now that oil prices seem to be levelling off?" Mr. Marion wrote.

Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report Friday that the question of another rate cut this year could largely be answered by how quickly the Bank of Canada believes the economy will get its anticipated bounce-back from the oil shock effects of the first quarter. Counterintuitively, he suggested that a more optimistic outlook from the bank might actually make another cut more likely.

If it expects the rebound to come in the second quarter, he wrote, "it will set a higher bar for the economy to meet, and make it easier for the Bank [of Canada] to be disappointed as the numbers roll in and deliver another rate cut."

But if Mr. Poloz and his colleagues are more cautious and calculate for the bounce-back to show up in the third quarter, that would make another rate cut less likely, even if the economy disappoints.

"By the time that [third] quarter shows a downside miss, a federal election [slated for the fall] could keep the Bank of Canada on the sidelines, and a late-year oil recovery could obviate a second cut," he said.