New Trade: BoC Preview – on Hold, but More Cuts to Come

Summary

• We think the BoC will remain on hold tomorrow. Since the last meeting, reciprocal tariffs have impacted Canada less, while core inflation has crept above 3% YoY.
• Given recent CAD appreciation, further labour market weakness and the potentially smaller hit to inflation, there may be more focus on Canada’s growth outlook in the months ahead.

Market Implications

• We enter 50% long CORZ5 at 97.645, target 98.000, stop 97.5.

BoC Will Hold Rates Steady in April

We think the BoC will remain on hold tomorrow. Here is an overview of the changes since the January MPR:

Q1 Data

Growth has been tepid and below BoC’s forecast of 2% QoQ SAAR. We expect the BoC to reduce its Q1 forecast to 1.3% QoQ, with a slower pace of growth expected in Q2. That is because the two headwinds for Q1 (i.e., GST holiday and frontloading of US imports) will be largely complete.

The inflation data is more problematic. Core inflation data (CPI-Trim and CPI-Median) has been stable above 3% for five successive months, three of which were above 3.4%. Curiously, inflation has stabilised at elevated levels despite:

1. An ongoing normalisation in wage growth – 3.5% YoY versus 4.9% YoY six months ago.
2. Rents and mortgage costs have slowed – 4.2% YoY versus 5.0% YoY six months ago.

This tells us there must be a combination of one-off lag factors and greater producer purchasing power appearing in the data.

This puts the BoC in a difficult spot because core inflation is now too high to ignore.

2025 Outlook

The previous MPR was also conducted assuming a no-tariff scenario with a series of stress tests provided to estimate the potential impact. More concrete estimates are likely not more details exist.

While it is hard to say which assumptions the BoC will use, we can say the following:

1. 2025’s GDP growth forecast to decline from 1.9% closer to 1%, with risks skewed to the downside.
2. 2025’s core inflation forecast to increase from 2.1% towards 2.8%.

We can also conclude that since 2 April, Canada has come away relatively better off than most feared as the reciprocal tariffs were applied to non-USMCA compliant trade. However, Canada is still impacted by auto tariffs and a slowing US economy. The latter will become more important. Also, there is a flipside; less severe tariffs also mean a lower shock to inflation – something the BoC will welcome given Q1’s data. Helpfully, CAD has strengthened by 3.5% versus the dollar over the past month, which should cap import prices in coming months.

Assuming the inflation data complies, this allows the BoC to shift its focus back toward growth.

Other Key Data

The recent employment report was notably weak. Consumer and business confidence have also declined. Therefore, today’s situation is not like 2022 where employment and wage growth were rising sharply.

Market Implications

We think the recent selloff in Z5 offers an opportunity back into the long side.

The market is currently pricing in a rate of 2.365% in December 2025, while we see room for the BoC to cut to 2%. Ideally, we would like to be short Z6 against this on a stronger fiscal response, but we are waiting for a more attractive entry point. Stronger inflation or growth data in the interim will help.

The main pushback against this trade is that it bets on the BoC cutting below its neutral band of 2.25-3.25%. However, we make three points:

1. The neutral estimate is a theoretical exercise as a useful signpost but must always be trumped by the data.
2. A lower inflation shock coupled with a still loosening labour market suggests monetary policy is still tight! This means an accommodative monetary stance may be required.
3. The best argument against the BoC cutting below its neutral band is that the fiscal response will be meaningful. While we do not disagree, it is yet to be seen. Also, this is where short Z6 or Z7 comes in – as a hedge on the long side.

To sum up, we enter 50% long CORZ5 at 97.645, targeting 98.000, and stop at 97.5.

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