BofA sees Bank of Canada rate cut to 2.50% on April 16

Investing.com -- BofA Securities has projected that the Bank of Canada (BoC) will lower its overnight policy rate by 25 basis points to 2.50% on April 16. This expectation comes amid signs that economic activity and the labor market in Canada are showing significant slowdowns, with heightened uncertainty due to tariffs. Despite this anticipated move, BofA Securities anticipates limited forward guidance from the BoC and a potential pause at the 2.50% rate for some time.

BofA economist Carlos Capistran points out that the Canadian economy has been impacted by the trade conflict with the United States, with recent data indicating stagnant activity and declining retail sales. February's GDP showed no change, and retail trade fell by 0.4%. Consumer and business sentiment also dipped in the first quarter, as reflected in the BoC’s Business Outlook Survey and the Canadian Survey of Consumer Expectations. These factors, combined with the introduction of higher tariffs by the U.S., are expected to further weaken economic activity in the months ahead.

The analyst also cited that the labor market in Canada experienced a downturn in March, with a loss of 32.6 thousand jobs, increasing the unemployment rate to 6.7%. Both manufacturing and service sectors were affected, suggesting a broader economic slowdown. Consumer confidence in job security, especially in trade-exposed industries, has also waned.

Inflation presents a complicating factor for the BoC's decision, according to Capistran. Both headline and core inflation rates increased in February, with the headline rate reaching 2.6% year-over-year, up from 1.9% in January. Core inflation measures are close to 3.0%, just below the BoC’s target range upper limit. Inflation expectations among consumers and businesses have risen, and there are concerns that tariffs could lead to higher prices, although the impact is expected to be temporary.

The BoC's upcoming decision is characterized as a close call by BofA Securities, with risks leaning towards a rate hold due to rising inflation and inflation expectations. However, the firm maintains that a rate cut is justified by the economic slowdown and labor market deterioration. The policy response by the BoC will hinge on the influence of tariffs on inflation and whether these pressures remain under control.