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Jun 04 - 02:55 PM

BofA: BoC to Cut Rates on June 5th and on Every Meeting After Through Year-End

By eFXdata  —  Jun 04 - 01:30 PM

Synopsis:

Bank of America forecasts that the Bank of Canada (BoC) will initiate a series of rate cuts starting with a 25 basis point reduction on June 5th, bringing the overnight rate down to 4.75%. BofA projects further cuts at every BoC meeting this year, anticipating the rate to hit 3.75% by year-end. This aggressive rate cut scenario is based on several economic indicators suggesting a slowing economy and subdued inflation.

Key Points:

  1. Economic Indicators: Canadian economic growth has been below potential for four consecutive quarters, leading to an increased unemployment rate and a closing output gap. Core inflation is also trending downwards, currently below 3%.

  2. Rate Cut Schedule: BofA predicts a 25bp reduction at each BoC meeting throughout the year. This is more aggressive than what market consensus might suggest, largely due to the slower economic momentum and cooling inflation.

  3. Market Strategy: BofA advises a strategy favoring long positions in the front-end CA rates versus US, predicting these will perform better. They also maintain a short-term bearish view on the Canadian dollar, anticipating that BoC guidance will remain dovish irrespective of immediate rate cuts.

Conclusion:

Bank of America's outlook suggests a significant loosening of monetary policy by the BoC in response to ongoing economic softness. While there is a risk of a delayed start or slower pace of cuts, BofA's base case is for consistent easing, which they believe will impact Canadian rate differentials and currency valuations.

Source:
BofA Global Research

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