EUR/CAD declines as BoC signals end to rate cuts amid tariff concerns

EUR/CAD moves lower around 1.6180 on Wednesday, down 0.40% for the day at the time of writing, as the Canadian Dollar (CAD) strengthens following the latest monetary policy decision by the Bank of Canada (BoC). The central bank cut its interest rate by 25 basis points to 2.25%, in line with market expectations, but signaled that the monetary easing cycle may now be over.

BoC Governor Tiff Macklem noted that the policy rate is now “about the right level if inflation and activity evolve as projected”, a statement interpreted by markets as a hawkish signal despite the rate cut. The BoC expects inflation to remain stable around 2% over the forecast horizon, while slightly revising down its Gross Domestic Product (GDP) projections for 2025 and 2026.

Macklem acknowledged that Canada’s economy continues to face significant headwinds from US trade policy and slowing global demand. However, he stressed that monetary policy has a limited ability to boost demand while keeping inflation low, given the damage tariffs are inflicting on key sectors such as autos, steel, aluminum, and lumber.

The BoC now expects the level of GDP to be about 1.5% lower by the end of 2026 compared with its January projection, as both weaker demand and lost capacity weigh on growth. The central bank also noted that Canada’s labor market has softened, with the unemployment rate rising to 7.1%.

According to TD Securities analysts, “the more hawkish tone of the statement suggests it would take a significant shock to justify further cuts,” adding that the Governing Council’s communication effectively removes the central bank’s easing bias. The analysts expect the interest rate to stay at 2.25% through year-end, with policy becoming more data-dependent in 2026.

National Bank of Canada analysts note that the Bank of Canada’s latest move “was not a cut-and-dry decision,” as stronger data on jobs and inflation complicated the outlook. However, the Governing Council ultimately judged that “the policy rate is now at about the right level to help the economy through this structural transition,” effectively signaling the end of the easing cycle if the central bank’s forecasts play out. The analysts believe that the BoC is “reasonably likely” done cutting rates, though they note that downside economic risks remain and that incoming data could still justify another reduction later this year if conditions weaken further.

Overall, the CAD’s firmness following the BoC’s meeting reflects investor confidence in the stability of Canada’s monetary policy, while the European Central Bank (ECB) is expected to keep its interest rate unchanged at 2% on Thursday.