The Bank of Canada is expected to maintain its current interest rate through most of 2027 and permit the Canadian dollar to depreciate further, even if the United States tightens its monetary policy, according to Bank of America.
No Case for Rate Hikes
Carlos Capistran, head of Latin America and Canada economics at BofA Securities, stated that there is no justification for the Bank of Canada to consider rate hikes in the near future, despite a weaker currency. Headline inflation in Canada stood at 2.8 percent in April, above the central bank's two percent target, but this was primarily driven by rising fuel costs. Underlying price pressures remain soft, Capistran explained during a webcast.
Weak Economy and Negative Output Gap
Capistran noted that the Canadian economy is weak and the output gap is negative, making it difficult to attribute inflation to demand pressures. A weak loonie typically does not generate significant inflationary pressure in Canada. Therefore, if the Federal Reserve were to raise rates, the Bank of Canada could stay on hold and allow the Fed's movement to affect the Canadian dollar.
The loonie fell to as low as $1.417 per U.S. dollar on Thursday, its weakest intraday level since April 2025. The U.S. dollar has been rallying, and oil prices have softened as traders anticipate the Federal Reserve will begin raising interest rates soon and expect the U.S.-Iran peace deal to hold.
