The Bank of Canada may keep the rate at 2.75% due to steady inflation

Bank of America expects the Bank of Canada to leave its key interest rate unchanged at 2.75% at its July 30 meeting. As the bank's chief economist Carlos Capistran explains, the reason for this is persistent core inflation and unexpectedly strong labor market data for June.

According to him, the Canadian economy added 83,100 jobs in June, mainly due to part–time employment and growth in the manufacturing sector. The unemployment rate dropped to 6.9% for the first time since January.

Although overall inflation slowed to 1.9% in June, the underlying indicators remain stable: the truncated and median inflation rose to 3.1%, while the index excluding energy resources remained at 2.7%. This, according to BofA analysts, makes policy easing premature.

At the same time, the macro data signals a slowdown in the economy.: GDP declined by 0.1% in April and May, and business and consumer expectations worsened. Despite this, BofA still predicts three rate cuts of 25 bps each in September, October and December, reaching 2.00% by the end of 2025. However, analysts warn that if inflation does not weaken, the Bank of Canada may keep the rate at the current level for longer.

In the foreign exchange market, BofA expects the US dollar to strengthen against the Canadian dollar, forecasting the USD/CAD exchange rate at 1.38 in the third quarter. The reasons are the divergence of the monetary policy of central banks and the relative stability of the US stock market.