Bank of America (BofA) economists anticipate that the Bank of Canada (BoC) will lower its overnight policy rate target by 25 basis points to 3% on January 29. This expected adjustment is based on the BoC's intention to pause and assess the impacts of domestic economic activity and developments in U.S. trade policy.
BofA indicates that inflation remains largely controlled, and there is an expectation of continued improvement in economic activity, making this new rate likely the terminal rate. Additionally, BofA's U.S. economists predict that the U.S. Federal Reserve will maintain its interest rates throughout the year.
However, the report highlights a potential shift in this outlook if the U.S. imposes tariffs on Canada, which may compel the BoC to further reduce rates to support the Canadian dollar as a protective measure.
The economists have also updated their forecasts for Canadian interest rates, acknowledging that tariffs could lead to lower rates if the market begins to anticipate additional cuts. The conclusion of the BoC's quantitative tightening (QT) is now expected in August 2025, with projected settlement balances ranging from CAD$50 billion to CAD$70 billion.
In terms of currency exchange effects, BofA identifies an initial target level of 1.42 for the USD/CAD exchange rate. They also suggest that the confirmation of tariffs could push the USD/CAD rate beyond the 1.45 resistance level, potentially reaching between 1.50 and 1.55 if the BoC adopts a dovish stance.