Bank of America expects the Bank of Canada to hold its policy interest rate steady at 2.25% when it meets on July 15. The U.S. bank cautions, however, that inflation remaining above the central bank's target creates the potential for hawkish communication that could alter market expectations.
In its assessment, Bank of America highlights a modest improvement in Canadian economic activity alongside better labour market readings. Those developments, the bank says, sit alongside continued uncertainty around trade, which it expects will keep influencing economic conditions going forward.
Market pricing currently reflects investor expectations for a pause in rate changes at the upcoming meeting. Bank of America notes that this pricing could be revised higher if the Bank of Canada conveys a hawkish stance. The bank identifies an explicit upside risk to rates should policymakers adopt such a tone.
On foreign exchange, Bank of America projects the U.S. dollar to edge higher against the Canadian dollar over the medium term, describing a modest upward drift for the USD-CAD pair. That outlook reflects the bank's broader view on how central bank communications and inflation dynamics may influence currency markets.
The bank's commentary ties together three themes: modest economic momentum, above-target inflation, and trade-related uncertainty. Together these elements form the basis for its central expectation of a July 15 hold at 2.25%, while also underpinning the conditional risks it outlines should central bank language turn restrictive.
Summary
Bank of America expects the Bank of Canada to keep rates at 2.25% at its July 15 meeting. The bank points to modest gains in economic activity and the labour market, notes persistent trade uncertainty, and warns that inflation above target could lead the central bank to adopt a hawkish tone. Markets are pricing a pause, and Bank of America sees the USD-CAD pair drifting modestly higher over the medium term.
Key points
- Expectation of a policy-rate hold at 2.25% at the July 15 meeting - impacts monetary policy and fixed-income markets.
- Modest improvements in activity and labour market data, with trade uncertainty continuing to affect the economy - relevant for exporters and broader economic growth.
- Bank of America flags upside risk to rates if the Bank of Canada adopts a hawkish tone; expects USD-CAD to drift modestly higher over the medium term - affects currency and financial markets.
Risks and uncertainties
- Inflation running above target - could prompt a hawkish policy signal and influence rates and bond markets.
- A hawkish tone from the Bank of Canada - would raise the risk of higher interest rates and alter market pricing.
- Ongoing trade uncertainty - may continue to weigh on economic activity and sectors exposed to international trade.