BoC set to hold interest rate amid soft inflation, global uncertainty
- The Bank of Canada is expected to keep its interest rate at 2.25%.
- The Canadian Dollar remains weak, with USD/CAD above 1.3700.
- Markets pencil in around 10 bps of hiking by the BoC this year.
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.
Economic Indicator
BoC Interest Rate Decision
The Bank of Canada (BoC) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoC believes inflation will be above target (hawkish), it will raise interest rates in order to bring it down. This is bullish for the CAD since higher interest rates attract greater inflows of foreign capital. Likewise, if the BoC sees inflation falling below target (dovish) it will lower interest rates in order to give the Canadian economy a boost in the hope inflation will rise back up. This is bearish for CAD since it detracts from foreign capital flowing into the country.
Read more.Last release: Wed Jan 28, 2026 14:45
Frequency: Irregular
Actual: 2.25%
Consensus: 2.25%
Previous: 2.25%
Source: Bank of Canada
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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