Synopsis:

Goldman Sachs sees the June 5 BoC rate decision as finely balanced, with April’s stronger-than-expected inflation complicating the case for a cut. Still, they expect the BoC to proceed with easing this year, while remaining bullish on the Canadian dollar over the medium term.

Key Points:

• June Cut Now a Toss-Up:

  • Recent soft GDP and labor data argue for easing.

  • But April’s inflation surprise—partly due to tariffs—makes it harder to justify an immediate cut.

  • Policymakers must weigh short-term inflation risks against downside growth risks and incoming fiscal stimulus.

• Base Case: Two Cuts This Year:

  • Goldman believes the BoC will look through tariff-related inflation and cut rates twice in 2025.

  • Past “insurance cuts” provide precedent for proactive easing.

• CAD Outlook:

  • Near-term CAD may firm on a less dovish BoC.

  • However, medium-term CAD strength should stem from:

    • Fiscal stimulus (notably the July tax cut)

    • Improved domestic growth from easier financial conditions

    • “Buy Canadian” trade dynamics.

Conclusion:

While the June BoC meeting could deliver a hawkish surprise, Goldman Sachs expects the BoC to cut rates later this year. They maintain a bullish CAD outlook, driven more by domestic growth momentum than short-term rate differentials.