Bank of America Securities expects the Bank of Canada to initiate a rate-cutting cycle in September, citing a sharper-than-anticipated economic contraction in the second quarter. According to economist Carlos Capistrán, a 25-basis-point reduction to 2.50% is likely at the BoC’s September 17 meeting, driven by faltering economic momentum and room to ease policy.
Canada’s economy shrank 1.6% on a quarterly annualized basis in the second quarter, far below both market consensus and BofA’s forecast. Exports plunged by nearly 27%, erasing first-quarter gains linked to frontloaded shipments to the U.S., while imports also declined 5.1%.
While final domestic demand rose 3.5%, thanks to robust household consumption, private investment extended its slump, contracting for the second consecutive quarter. Capistrán noted there were “mixed signals coming from the domestic demand, with investment being particularly weak.”
On a monthly basis, June’s GDP fell 0.1%, matching May’s decline and disappointing analysts. The downturn was driven by the goods-producing sector, particularly in manufacturing and utilities, whereas services posted slight gains.
Despite the weak headline figures, BofA is maintaining its growth forecast for 2025 at 1.4% and 2026 at 1.5%. Strong consumption and expectations for a pick-up in investment underpin that outlook, even as downside risks persist if trade tensions with the U.S. persist.
“The resilience of Canada’s economy is being put into question by this print,” Capistrán wrote, adding that the downside GDP surprise and ongoing labor market softness will create space for policy easing. The BoC’s own expectations were more optimistic, projecting a 1.5% second-quarter drop.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads. Following the anticipated September cut, BofA sees the BoC delivering two more 25-basis-point reductions in October and December to reach a terminal rate of 2.0%. With core inflation softening and GDP momentum stalling, the central bank may move more aggressively than previously believed.
