• Despite unchanged rates at 5% today and a conservative approach due to past forecasting errors, the Bank of Canada (BoC) signals a dovish stance, hinting at a June cut with eased conditions for rate reductions.

  • The BoC's Monetary Policy Report shows a more dovish outlook with inflation expected to decrease to 2.8% in Q1 and to 2.2% by Q4 2024, aiming for a 2% target by 2025

  • Updated potential output growth to 2.5% for 2024 suggests the economy can grow without fueling inflation, supporting a softer landing.

  • Despite positive revisions, there's caution about the demand outlook and core inflation's slow pace, suggesting a quicker return to the inflation target.

  • Anticipation of BoC cutting rates at every meeting from June, potentially reducing the policy rate by 125bps to 3.75%, unless external factors, like US inflation or oil price rises, alter the course.

  • March's US inflation report affected market expectations, reducing anticipated BoC rate cuts from three to two and a half for the year.

  • Expected BoC rate cuts in contrast to a more inflationary US might widen USDCAD swap rates, supporting a climb to 1.38-1.40 range in Q2, though not exceeding 1.40 due to Canada's lower recession risk and the Fed's policy path.