Synopsis:

Bank of America expects the Bank of Canada to keep rates unchanged at its June meeting, as hotter-than-expected core inflation offsets growing labor market weakness and downside risks to growth.

Key Points:

• Sticky Core Inflation:
  April’s average core CPI (trimmed + median) surprised to the upside at 3.15% YoY, the first breach above 3% since May 2024. This marks a steady increase since December.

• Not Just Tariff-Driven:
  The inflation surge is not solely due to tariffs. Services inflation rose to 3.5% YoY, suggesting underlying price pressures that will worry policymakers.

• BoC Policy Call:
  Despite labor market softening and economic slowdown, the BoC is expected to remain on hold at the June meeting. BofA sees the next cut coming later in 2025.

• Risks:
  The main risk to this view is that the BoC cuts earlier than forecast, prioritizing deteriorating employment conditions over recent inflation prints.

• FX View:
  BofA maintains a downtrend in USD/CAD but notes the move is likely to be backloaded, as the BoC delays easing.

Conclusion:

BofA sees the BoC caught between rising core inflation and a cooling labor market. The central bank is expected to hold rates steady in June, with easing likely deferred to later in the year. For USD/CAD, BofA remains moderately bearish but anticipates a slower path lower.