BCA sees Canada interest rates hitting 2%, CAD stabilizing

Investing.com -- On Thursday, BCA Research strategist Chester Ntonifor offered a report outlining expectations for the Canadian economy, including a forecast that the Bank of Canada (BoC) is likely to reduce interest rates to 2% this year. The report comes on the heels of the BoC's recent decision to cut rates by another 25 basis points, following a similar adjustment on January 29th. BoC Governor Tiff Macklem and the governing council faced a challenging decision amid fluid tariff news, which BCA believes could lead to deflationary pressures for Canada.

According to BCA, the uncertainty surrounding trade policy alone could dampen business spending and hiring, justifying the BoC's potential rate cuts. Despite the recent jobs data showing only a small increase of 1.1K jobs in February, compared to the expected 20K, and a loss of full-time positions, BCA maintains a neutral stance on Canadian bonds. They suggest a widening of provincial bond spreads, particularly in Quebec, as a strategic investment move.

The BoC's anticipated rate cuts are seen as part of a necessary adjustment to its monetary policy framework, which is set for renewal in 2026. The framework, which has traditionally focused on stable inflation within a target band of 1%-3%, may be revised to allow for more agility in response to external shocks.

BCA also touched on the Canadian dollar CAD/USD, noting that it has reached capitulation levels but is expected to stabilize. They argue that much of the negative impact from U.S. tariffs has already been factored into the CAD's value. BCA advises remaining long on the AUD/CAD, but expects the USD/CAD pair to likely be lower in 12 months.

The report also discusses the impact of tariffs on inflation and the CAD, suggesting that while a weak CAD could lead to imported inflation, the labor market will be a more significant factor in determining Canada's inflation rates. BCA remains cautious on provincial bonds relative to federal notes and anticipates a widening of spreads, especially in light of a potential recession indicated by their recession watch metrics for Canada.

In conclusion, BCA's outlook suggests that while the CAD has faced depreciation, it is poised for stabilization, and the BoC's rate cuts are seen as a proactive measure to support the Canadian economy amidst trade uncertainties. BCA advises investors to monitor labor market health and provincial bond spreads for investment opportunities.