BoC set to keep rates unchanged, reinforcing its wait-and-see stance
- The Bank of Canada is expected to keep its interest rate at 2.25%.
- The Canadian Dollar remains firm, dragging USD/CAD to yearly lows.
- Markets pencil in around 10 bps of hiking by the BoC this year.
The Bank of Canada (BoC) is widely expected to leave its benchmark rate unchanged at 2.25% at Wednesday’s meeting, extending the pause it signalled back in December.
At its last decision, the central bank made clear it sees policy as roughly where it needs to be to keep inflation close to the 2% target, so long as the economy behaves as expected. Still, officials were keen to underline that they’re not locked in and stand ready to respond if the outlook deteriorates or inflation risks re-emerge.
On inflation, the message remains cautiously reassuring. Headline CPI is projected to hover near the target as spare capacity in the economy helps offset cost pressures tied to trade reconfiguration. Even so, underlying inflation is still running a little hot, suggesting the disinflation process isn’t complete.
The growth picture is also uneven: Q4 GDP is expected to come in soft, with firmer domestic demand likely to be outweighed by a drag from net exports. That follows a surprisingly strong Q3, which the BoC has largely put down to trade-related volatility rather than a genuine pickup in momentum. The labour market offers a slightly brighter note, with early signs of improvement reinforcing the Bank’s wait-and-see approach.
Inflation, however, remains the key watchpoint after the headline CPI edged up to 2.4% YoY in December, while core inflation eased to 2.8% YoY. The bank’s preferred measures, CPI-Common, Trimmed and Median, also ticked lower, but at 2.8%, 2.7% and 2.5% respectively, they remain comfortably above target.
Previewing the BoC’s interest rate decision, analysts at the National Bank of Canada (NBC) noted, “The Bank of Canada is set to leave its overnight target unchanged at 2.25%, a decision widely expected by forecasters and OIS markets. This would mark the second consecutive hold after policymakers declared in October that policy is at ‘about the right level’ to keep inflation near target and support the economy’s transition”.
When will the BoC release its monetary policy decision, and how could it affect USD/CAD?
The Bank of Canada will announce its policy decision on Wednesday at 14:45 GMT alongside the Monetary Policy Report (MPR), followed by a press conference with Governor Tiff Macklem at 15:30 GMT.
Markets anticipate the central bank will maintain its current stance, with a projected tightening of approximately 10 basis points by the end of 2026.
Pablo Piovano, Senior Analyst at FXStreet, points out that the CAD has been appreciating steadily against the Greenback since its yearly lows past the 1.3900 barrier recorded earlier in the month. He adds: “Indeed, USD/CAD has recently broken below the 1.3700 support to hit new 2026 lows, exposing a potential test of the December 2025 floor at 1.3642 (December 26). South from here sits the weekly trought at 1.3575 (July 23), ahead of the July 2025 base at 1.3556 (July 3) and the 2025 bottom at 1.3538 (June 16).”
From here, Piovano says a return of bullish momentum could prompt USD/CAD to initially reclaim its key 200-day SMA at 1.3833 prior to the 2026 ceiling at 1.3928 (January 16). Up from here comes the key 1.4000 threshold seconded by the November top at 1.4140 (November 5).
“Momentum favours extra declines,” he adds, noting that the Relative Strength Index (RSI) approaches the 33 level and the Average Directional Index (ADX) near 27 is indicative of a pretty firm trend.
Economic Indicator
BoC Monetary Policy Report
A quarterly diagnostic review of the health of the Canadian economy, The Bank of Canada Monetary Policy Report is a study of the Canadian economy, including forecasts for all key metrics, as well as an assessment of future risks. Any changes in this report tend to affect Canadian Dollar (CAD) volatility. If the BoC presents a hawkish outlook, that is seen as bullish for CAD, while a dovish outlook is seen as bearish.
Read more.Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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FXStreet Team
FXStreet
