BoC set to hold interest rate amid soft inflation, global uncertainty

The Bank of Canada (BoC) is widely expected to keep its policy rate unchanged at 2.25% at its Wednesday meeting, effectively extending the pause it signalled back in January.

At that meeting, policymakers did exactly that, leaving the policy rate at 2.25%, broadly in line with market expectations. The decision reinforced the bank’s cautious, wait-and-see approach as officials continue to navigate a rather uncertain global backdrop amid the US-Iran war and the Oil supply disruptions through the Strait of Hormuz.

While higher crude prices could add to inflation risks, Canada is also a major Oil exporter, meaning stronger energy prices may support economic growth.

The updated projections also paint a somewhat softer picture for the economy. The economy is still projected to expand, with GDP rising by roughly 1.1% anticipated for 2026. However, the trajectory of that growth appears less robust.

In fact, the bank now sees activity losing momentum toward the end of the forecast horizon, with growth expected to be flat in the fourth quarter.

The inflation picture is looking a bit brighter, as the Consumer Price Index (CPI) is projected to average roughly 2% this year. Furthermore, this slight dip indicates that inflationary pressures are moving toward the bank's target.

In addition, policymakers kept their estimate of the neutral rate unchanged in the 2.25%-3.25% range.

In his previous press conference, Governor Tiff Macklem cautioned that the changes to US tariffs might be permanent, even hinting that the period of unrestricted, rules-based trade between Canada and the US could be over.

Overall, the BoC’s message is clear: officials appear satisfied with maintaining interest rates at their current levels, at least for now, while closely monitoring the economy's slower growth and the unpredictable global situation.

Inflation, however, remains the key watch point after the headline CPI edged up to 1.8% YoY in February, falling below the bank’s target for the first time since August 2025. In the same direction, the core inflation eased to 2.3% from a year earlier. The bank’s preferred measures, CPI-Common, Trimmed and Median, also ticked lower, but at 2.4%, 2.3% and 2.3%, respectively, they remain comfortably above target.

Previewing the BoC’s interest rate decision, strategists Molly Schwartz and Christian Lawrence at Rabobank noted, “We expect the Bank of Canada to maintain the overnight policy rate at 2.25% through year-end; however, the market is starting to price the possibility of a hike into the OIS curve.”

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, followed by a press conference with Governor Tiff Macklem at 14:30 GMT.

Markets anticipate the central bank to maintain its current stance, with a projected tightening of approximately 42 basis points by the end of 2026.

Pablo Piovano, Senior Analyst at FXStreet, points out that the Canadian Dollar (CAD) has been depreciating steadily against the Greenback since its monthly troughs in the low 1.3500s, finding some decent resistance around 1.3750 in the last few days.

Piovano says a return of a more convincing bullish momentum could prompt spot to initially reclaim the March top at 1.3752 (March 3), ahead of its key 200-day SMA at 1.3798 and 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).

On the downside, he adds, "The loss of the March base at 1.3525 (March 9) could put a test of the February valley at 1.3504 (February 11) back into view ahead of the 2026 bottom at 1.3481 (January 30).

“Momentum favours extra gains,” he suggests, noting that the Relative Strength Index (RSI) hovers near the 54 level, although the Average Directional Index (ADX) around 14 is indicative of a pale trend.