07:18 AM EDT, 07/18/2025 (MT Newswires) -- A series of positive economic surprises of late should keep the Bank of Canada sidelined for its July 30 meeting, said National Bank of Canada.

More generally, June employment and inflation data contributed to a swift repricing in BoC easing expectations, with markets expecting less than one full (25 bps) cut this year, noted the bank.

Despite recent data, National Bank still sees an avenue to further BoC rate relief. First, the bank is skeptical of reported job market strength given its inconsistency with measures of labor demand and business sentiment.

Second, National Bank remains unconcerned about the Canadian inflation outlook, thanks to relatively restrained tariff retaliation and incoming relief in shelter prices. Third, risks of prolonged and escalating Canada-United States trade tensions may be underappreciated by investors.

Altogether, National Bank's outlook is consistent with 50 bps of BoC easing this year, bringing the overnight target to 2.25%.

Bond markets have grown more sensitive to fiscal policy, and investors have taken notice of Canada's growing budget deficit, added the bank. Despite a 225 bp drop in the policy rate, longer-term borrowing costs have risen relative to the start of the easing cycle.

Canada's underlying fiscal fundamentals may be in better standing than key peers but that won't be enough to buck the global trend towards steeper curves, a dynamic reflected in National Bank's refreshed rates forecast. Relative to the bank's June Fixed Income Monitor, it has revised up its policy rate targets in Canada and the U.S. by 25 bps.

Earlier easing at the BoC supports Government of Canada (GoC) outperformance in the near-term, but National Bank expects that to be short-lived as Federal Reserve cuts come into focus later this year.