Bank of America Merrill Lynch believes the next act by the Bank of Canada may well be a rate cut.

Some observers expect Canada's central bank will move next to hike its benchmark rate, albeit not any time soon. But Bank of America's Emanuella Enenajor and Ian Gordon aren't counting on that.

"As the Fed hikes, the spillover effect of higher long-term rates in Canada will likely tighten financial conditions, reducing the need for any BoC policy tightening," Ms. Enenajor, Bank of America's Canada and U.S. economist, and Mr. Gordon, a foreign exchange strategist, say in a new report, referring to the Fed's first rate hike, expected by the fall.

"Even as the Fed begins a gradual rate hike cycle this year, we think the BoC will remain accommodative, and will likely ease by another 25 basis points to 0.5 per cent if growth disappoints, as we expect," they add in their report, titled "Handcuffed by the Fed."

Governor Stephen Poloz and his Bank of Canada colleagues surprised markets in January with a cut in their benchmark overnight rate to 0.75 per cent, taking out what they called "insurance" amid the oil shock.

But the central bank believes the impact of the plunge in crude prices was "front-loaded," meaning a lame first quarter for economic growth but potentially better times from there on in.

Ms. Enenajor and Mr. Gordon, though, expect that the tighter financial conditions in Canada that will follow a Fed hike will "exert a notable headwind to domestic growth," which could in turn prompt the Bank of Canada to move lower, likely in October.

This all has ramifications for the Canadian dollar, too, and many obsevers expect it to sink again in time.

‎"In this environment of divergent monetary policy, we see flows into Canadian fixed income struggling, weighing on the demand for the C$ given a sizeable current account deficit," said Ms. Enenajor and Mr. Gordon.

"Together with our assessment that the C$ remains fundamentally overvalued, we remain comfortable with our forecast for USD-CAD to finish 2015 at 1.27."

Referring to the U.S. and Canadian dollars by their symbols, they mean by that the loonie should close the year at over 78.5 cents U.S.