BoC holds at 2.75%, highlights tariff risks – Danske Bank

Before the Easter break, the BoC held the policy rate at 2.75% as expected by markets and the majority of analysts, Danske Bank's FX analysts report.

Market sees more cuts ahead despite policy pause

"The BoC reiterated that monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war and emphasized their mandate to keep inflation at 2% amid the threat of additional upward price pressure from tariffs. The MPR was naturally focused on tariffs, but instead of the usual single base-case projection, it presented two scenarios - one based on relatively normalised trade relations, and the other grounded in a protracted trade war."

"The first scenario pencils in slightly weaker Canadian growth and inflation staying around the 2% target, while the gloomier case entails a Canadian recession and inflation temporarily creeping above 3% next year. The estimate for the neutral rate was unchanged from April 2024, remaining between 2.25% and 3.25%. Overall, the meeting was very tariff-oriented, as widely expected."

"The market reaction was muted, with a knee-jerk reaction that saw USD/CAD ticking slightly lower. Looking ahead, markets are now pricing in 16bp worth of cuts compared to 10bp before the meeting, suggesting that this is not the BoC concluding the easing cycle, but rather taking a breather to assess the uncertainty related to tariffs, while prioritizing its inflation mandate."