Bank of Canada Can Let Loonie Weaken and Skip Hikes, BofA Says

The Bank of Canada is likely to keep rates on hold through most of 2027 and allow the Canadian dollar to weaken further even if US monetary policy tightens, says.

The loonie fell as low as C$1.417 per US dollar on Thursday, its lowest intraday level since April 2025. The greenback has been rallying, and oil prices have been softening, as traders bet that the Federal Reserve will start raising interest rates soon and that the US-Iran peace deal will hold together.

But even with a weaker currency, there’s simply no case for the Bank of Canada to consider rate hikes soon, said Carlos Capistran , head of Latin America and Canada economics at BofA Securities. Headline inflation was 2.8% in April, above the central bank’s 2% target, but it was . Underlying price pressures are soft, Capistran said.

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“The economy is weak and the output gap is negative. So it’s very difficult to think that inflation is there because of demand pressures,” he said during a webcast.

A weak loonie doesn’t typically lead to much inflationary pressure in Canada, Capistran said. So if the Fed were to hike, “I think that the Bank of Canada could still remain on hold and let that Fed movement go to the Canadian dollar.”