BoC's Macklem: Inflation expectations are not as well anchored as they were before Covid

Tiff Macklem faced the press shortly after the decision, offering markets a clearer sense of the central bank’s thinking. The appearance followed the widely expected move by the Bank of Canada to hold the policy rate steady at 2.25%.

BoC press conference key highlights

Tiff Macklem

If energy prices stay higher for longer, there could well be a need to raise the policy rate.

There is no set timeline for possibly raising rates.

There is no risk-free path for the policy interest rate.

If we had raised the rate now and oil prices had then gone down, by the time the rate was impacting the economy we would wish we had not raised the rate.

We have some slack in the economy, so we do not think higher energy prices will be rapidly passed through to goods and services.

I would not characterise today’s comments as forward guidance.

It is useful to convey how we would handle various potential outcomes.

There is a risk that inflation expectations are not as well anchored as they were before Covid.

It does not look as though Canadians’ confidence in our credibility and resolve has been eroded.

Carolyn Rogers

Over the longer term, trade tensions are a bigger threat to the economy than higher oil prices.

The lesson from the Covid episode is that Canadians really do not like inflation.

There is not a single inflation number where we would completely change our view.

This section below was published at 13:45 GMT to cover the Bank of Canada's policy announcements and the initial market reaction.

As widely anticipated, the Bank of Canada (BoC) left its policy rate unchanged at 2.25% on Wednesday. The focus now turns to Governor Tiff Macklem’s press conference at 14:30 GMT, where markets will be looking for further insight into today’s decision and clearer guidance on the policy outlook.

BoC policy statement key highlights

Growth is seen at 1.2% in 2026, up from 1.1% in January. Growth is projected at 1.6% in 2027 and 1.7% in 2028.

Inflation is expected to average 2.3% in 2026, above the previous 2.0% projection. Inflation is seen at 2.1% in 2027 and 2.0% in 2028.

The output gap in the first quarter is estimated between -1.5% and -0.5%, unchanged from January.

Forecasts assume US tariffs remain unchanged and oil prices gradually decline to $75 per barrel by mid-2027.

Annualised GDP growth is seen at 1.5% in the first quarter, down from 1.8% previously, with the second quarter also projected at 1.5%.

The nominal neutral interest rate is estimated in the range of 2.25% to 3.25%, unchanged from January.

Potential output growth is now seen at 1.2% in 2026 and 1.3% in 2027, both revised higher.

Most measures of annual wage growth are between 3% and 3.5%.

Bottom line

The Bank of Canada is signalling patience. Inflation is proving a touch more persistent, while growth remains soft but stable.

This keeps the central bank firmly in wait-and-see mode, leaning against early rate cuts without turning outright hawkish.

Market reaction

The Canadian Dollar (CAD) trades on the back foot, lifting USD/CAD to the area of three-day highs just over 1.3700 the figure on Wednesday in the wake of the bank’s interest rate decision.

This section below was published as a preview of the Bank of Canada's (BoC) monetary policy announcements at 13:45 GMT.

• The Bank of Canada is widely expected to leave the interest rate unchanged at 2.25%.
• Policymakers will require more time to assess the impact of the Middle East war.
• Investors will be attentive to the bank’s inflation expectations for Canada.

The Bank of Canada (BoC) is widely expected to keep its monetary policy rate unchanged at 2.25% for its fourth consecutive meeting on Wednesday, requesting more time to assess the impact on inflation and economic growth from the US-Iran war. A shift in long-term inflation expectations emerging from higher energy prices due to the Middle East conflict could trigger the next big reaction in the Canadian Dollar (CAD).

The BoC left its monetary policy unchanged at its previous meeting in March and removed forward guidance references that the current rate is appropriate. The bank’s statement noted that economic growth had weakened in the first quarter of the year and that the energy shock from the Middle East war would keep prices at high levels in the near-term

Canada’s Consumer Prices Index (CPI) figures from March confirmed those views. Inflation accelerated to a 2.4% year-on-year rate from 1.8% in February, exceeding the BoC’s 2% target, yet falling short of the 2.5% expected by the market, which provides the central banks with some leeway to wait for additional data.

The BoC Governor, Tiff Macklem, practically discarded any immediate monetary policy reaction earlier in April. Macklem said that he is not concerned about the short-term spike in prices. The central bank’s latest CPI projections foresee inflationary pressures easing to 2.2% by the end of the year and 2.1% in 2027.

Furthermore, Canadian economic growth is starting to stutter with the trade relationship with its main partner, the United States (US), under review. The Gross Domestic Product (GDP) contracted at a 0.6% annualized pace in the fourth quarter of 2025. The monthly GDP barely rose 0.1% in January, according to the latest data released, and the IVEY Purchasing Manager’s Index (PMI) seasonally adjusted unexpectedly fell into contraction levels in March, suggesting that growth has remained sluggish in the first months of 2026. Unless this scenario changes radically, monetary tightening is likely to be off topic.

Looking forward, market analysts at TD Securities expect the BoC interest rate to remain steady for the foreseeable future: "We still expect the BoC to stay on hold for the rest of 2026, especially given the downside surprise on recent CPI. The recent moves higher in rates, particularly in BoC pricing further out, should be seen more as a function of importing the pricing out of Fed rate cuts rather than an accurate reflection of a change of outlook. December is currently priced in at 2.61%, and a return to pre-war levels will likely be slower rather than traded off a single dovish data point or communication."

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 13:45 GMT, and a press conference by Governor Tiff Macklem will ensue from 14:30 GMT onwards.

A report released by Reuters earlier this week revealed that the market is practically fully pricing steady interest rates after the April meeting, with 76% of the polled analysts expecting no change in the monetary policy in 2026. 

The USD/CAD has been trading within a bearish channel since peaking near 1.4000 in late March. The pair has bounced up from nearly seven-week lows, at 1.3605, but upside attempts remain seen as good entry opportunities for sellers, rather than real recovery attempts.

On the upside, Guillermo Alcalá, FX Analyst at FXStreet.com, expects bulls to be challenged at the resistance area above 1.3700. “The pair found some support near 1.3600 to trim losses as the US Dollar (USD) picks up ahead of the Federal Reserve’s (Fed) meeting, which is also due on Wednesday. The pair, however, is likely to meet resistance at last week’s highs, right above the 1.3700 level. A confirmation above that level would signal a deeper recovery towards a previous support-turned-resistance in the area of 1.3800.

A rejection at those levels would confirm the bearish trend, according to Alcala: “The pair has reached the 78.6% Fibonacci retracement of the March bull run, a common target for corrections, but has not given clear signs of a trend shift as of yet. In this sense, Monday´s low, at 1.3597, remains on the bears' radar. Further down, the pair would need a dovish Fed or an even more unlikely hawkish surprise by the BoC, to extend losses towards the confluence of the channel bottom with March 9 lows, at the 1.3525 area.”