Bank of America has told clients it expects the Bank of Canada to keep its key interest rate steady through 2027. The forecast, detailed in a research note, suggests the central bank will prioritize supporting the economy over fighting inflation for years to come.
What a long rate hold means for the loonie
If the Bank of Canada holds rates while other central banks eventually ease or tighten, the Canadian dollar — known as the loonie — is likely to weaken. A cheaper currency makes Canadian goods cheaper abroad, which could give exporters a lift. But the flip side is higher costs for imported goods, from food to machinery.
That dynamic complicates the Bank of Canada's inflation fight. Import prices feed directly into consumer price indexes, and a prolonged period of elevated import costs could keep headline inflation above the bank's 2% target. The central bank would then face a difficult trade-off: let inflation run a bit hot to keep exports humming, or raise rates and risk choking off growth.
Exports get a boost, but at a price
Canadian manufacturers and resource companies would likely welcome a weaker loonie. Their products become more competitive in global markets, which can lift profits and employment. But the benefit doesn't come free. Households and businesses that rely on imported inputs will feel the pinch. That includes everything from fresh produce in winter to parts for assembly lines.
The overall effect on the economy depends on how much export gains offset import inflation. Bank of America's analysis leans toward the view that the Bank of Canada is willing to accept a bit of import-driven inflation in exchange for stronger export performance.
Investor returns face pressure
For investors, a multi-year hold on Canadian rates means bond yields will likely stay lower than in countries where rates rise. That can reduce returns on Canadian fixed-income holdings and push capital toward markets with higher yields. Currency risk also rises: anyone holding Canadian assets denominated in loonies faces the possibility of depreciation against the US dollar or other major currencies.
The policy stance could also affect equity markets. Export-oriented companies might outperform, while domestic-focused firms that compete with imports could struggle. Sector rotation within the TSX may accelerate if the rate hold becomes a consensus view.
None of this is set in stone. The Bank of Canada has not signaled its own plans beyond the next few meetings, and economic data could shift the outlook. But Bank of America's call gives the market a concrete scenario to trade around — at least until the central bank itself says something different.
