The Bank of Canada appears content to sit on its hands while the Canadian dollar takes a beating. Bank of America sees the central bank holding its policy rate steady through 2027, even as the US Federal Reserve keeps its own rates elevated, a divergence that would let the loonie drift lower against the greenback.
The BoC held its benchmark rate at 2.25% on June 10, marking the fifth consecutive meeting without a meaningful change.
The case for doing nothing
The BoC is caught between competing pressures that make action in either direction risky. Domestic growth remains weak, while energy-driven inflation is running hot enough that cutting rates further would be reckless.
Market participants surveyed in March 2026 don’t expect the first BoC rate increase until at least early to mid-2027. Multiple Canadian financial institutions, including National Bank and TD, have penciled in the overnight rate staying at or near 2.25% through most of the coming year, with a gradual normalization toward 2.5% to 2.75% eventually materializing in 2027.
The loonie pays the price
The direct consequence of holding rates steady while the US maintains higher borrowing costs is a widening interest rate differential between the two countries. When Canadian rates sit meaningfully below American ones, investors have less reason to hold Canadian dollar-denominated assets.
A weaker Canadian dollar makes Canadian exports cheaper on the global market, which helps manufacturers and commodity producers compete. But it also makes imports more expensive, which feeds back into the inflation problem the BoC is already struggling with.
What this means for investors
For bond investors, if inflation continues running above target while rates stay anchored, real returns on those bonds erode.
Canadian equities tied to the energy sector deserve particular attention. Energy-induced inflation is one of the primary reasons the BoC can’t cut further, but energy companies themselves often benefit from both higher commodity prices and a weaker domestic currency, since their revenues are frequently denominated in US dollars.
BofA’s commentary during this period has focused heavily on the US Federal Reserve delaying its own rate cuts into late 2027. If that timeline holds, the gap between Canadian and American monetary policy could persist even longer than current projections suggest.
