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Investing.com -- Bank of America (NYSE:BAC) expects the Bank of Canada to hold its key policy rate at 2.75% on July 30, pointing to persistent core inflation and June’s unexpectedly strong labor market as reasons for caution. The firm sees no shift in forward guidance, with policymakers likely to maintain a “wait and see” posture amid ongoing economic uncertainty.
BofA economist Carlos Capistran writes that “we expect the BoC to leave its monetary policy rate unchanged at 2.75% on July 30.” He adds that the “positive surprise observed in June’s labor market report” and “sticky core inflation” are key factors behind the decision to delay any cuts.
Labor market strength was evident last month, with 83,100 jobs added, led by part-time positions and solid gains in manufacturing and private sector employment. The unemployment rate dropped to 6.9% from 7.0%, marking the first decline since January and suggesting more resilience than previously assumed.
Capistran acknowledged that although headline inflation was muted at 1.9% in June, underlying pressures persisted. Core inflation, measured as the average of trimmed mean and median CPI, ticked up to 3.1%, while CPI excluding energy held steady at 2.7% year-over-year, reinforcing the BoC’s reluctance to ease.
Meanwhile, BofA believes economic data reflects slowing momentum. Monthly GDP contracted by 0.1% in both April and May, largely driven by weakness in manufacturing and a decline in business and consumer sentiment.
“Growth is deteriorating at the margin after showing resilience in 1Q,” Capistran said, noting that April’s manufacturing output posted its sharpest decline in more than three years. The BoC’s Business Outlook Survey and consumer spending data also point to weakened expectations heading into the second half of the year.
Nonetheless, BofA expects the BoC to begin reducing rates later this year, forecasting three 25bp cuts: in September, October, and December, bringing the policy rate to 2.00% by year-end. Capistran warns, however, that “the risk to our call is for the BoC to remain on hold for longer than we expect” if inflation fails to decelerate meaningfully.
On the currency front, BofA maintains a constructive view on USD/CAD, projecting the pair to reach at least 1.38 in the third quarter. Analysts cite diverging central bank policies and relative equity market strength in the U.S. as key contributors to Canadian dollar softness.