Investing.com -- Bank of America (NYSE:BAC) Securities said the Bank of Canada’s decision to hold its policy rate at 2.75% reflects a wait-and-see approach amid persistent inflation and geopolitical trade uncertainties. The central bank’s June 4 announcement kept rates unchanged, in line with expectations, while highlighting “some unexpected firmness in recent inflation data” and ongoing concerns over U.S. tariffs.

BoC Governor Tiff Macklem noted, “There was a clear consensus to hold policy unchanged as we gain more information.” The central bank’s stance suggests it is prioritizing stability while awaiting further data on inflation and growth momentum.

Carlos Capistran, economist at BofA Securities, said the Bank’s statement and press conference indicated a slightly more dovish tilt, pointing to a willingness to ease policy if economic conditions deteriorate. Macklem remarked that “members thought there could be a need for a reduction in the policy rate if the economy weakens… and cost pressures on inflation are contained,” signaling potential future cuts.

Still, Capistran emphasized the BoC’s caution in rushing to cut rates, particularly given sticky core inflation readings. “Underlying inflation could be a bit firmer than we thought,” Macklem acknowledged during the Q&A, reinforcing the Bank’s stance to assess incoming data closely before making changes.

Capistran expects the BoC to hold its policy rate at 2.75% at the July meeting and begin cutting rates in the fall. BofA forecasts three 25bp reductions in September, October, and December, which would take the benchmark rate to 2.00% by year-end.

Market reaction in the rates complex was notably dovish, with Canadian yields declining across the curve. Capistran said the move validated BofA’s tactical positioning, and the firm has since closed its pay June BoC OIS trade at target.

In currency markets, USD/CAD slid below 1.37 to a new 2025 low after softer U.S. ISM services data compounded the BoC’s caution. Capistran said the pair’s near-term direction will be shaped by labor reports from both countries, with a stronger-than-expected Canadian print potentially extending recent CAD gains.

Capistran remains skeptical of current market pricing, which implies roughly a 50% chance of a July rate cut. “We see the probability of a cut as currently overpriced,” he argued, noting that two CPI and two labor reports still lie ahead before the BoC’s next policy decision.

Related articles

BofA: Bank of Canada in no rush to ease despite dovish hints

Citadel’s Griffin: cost of U.S. default insurance is "unfathomable"

Tariffs, oil prices, and a stronger Loonie drag Canada’s April exports down 10.8%