BoC set to keep interest rates steady for sixth consecutive meeting

• The Bank of Canada is expected to keep its interest rate at 2.25%.
• The Canadian Dollar extends its recovery vs the US Dollar.
• Markets pencil in just over 15 bps of BoC tightening by year-end.

The Bank of Canada (BoC) is widely expected to keep its policy rate unchanged at 2.25% on Wednesday. This would be the sixth consecutive event with the central bank keeping its hand steady.

The BoC left its policy rate unchanged at 2.25% last month, as widely anticipated. The statement and Governor Tiff Macklem's press conference reinforced a patient approach, as policymakers continue to balance lingering inflation risks against an economy that remains in excess supply.

The central bank expects inflation to hover around 3% in the near term before gradually easing back toward its 2% target. In addition, policymakers also reiterated that they are largely looking through the impact of the Middle East conflict on headline inflation, noting limited evidence that higher energy prices are feeding through more broadly into consumer prices.

While the board stressed it would not allow higher energy costs to become a source of persistent inflation, it gave little indication that a policy response is imminent. Additionally, rate setters also pointed to a likely rebound in growth during Q2, although they cautioned that economic activity remains weak and uncertainty surrounding US trade policy persists.

During his press conference, Governor Macklem emphasised that any future policy move will depend on economic conditions rather than on a predetermined timeline. He noted that core inflation has edged lower, reiterated that economic weakness continues to weigh on prices and argued that little has changed since the previous meeting, with incoming data broadly evolving as expected.

Inflation, however, remains the key watch point after the headline CPI rose by 3.2% in the year to May, above the previous month’s print of 2.8%. In the same direction, the BoC’s core inflation ticked higher to 2.2% from a year earlier. The bank’s preferred measures — CPI-Common, Trimmed and Median — came in mixed. But at 2.7%, 2% and 2.1%, respectively, they still remain above target.

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 maintaining its current stance, with a projected tightening of nearly 17 basis points by the end of 2026.

Pablo Piovano, Senior Analyst at FXStreet, points out that further gains in USD/CAD now appear limited by the 1.4250 zone, forcing the pair to recede and revisit the area of multi-week troughs near 1.4050.

“In case the selling pressure gathers traction, the pair’s next relevant support is expected at the provisional 55-day Simple Moving Average (SMA) near 1.3930, while the loss of this region exposes a move toward the critical 200-day SMA around 1.3850, closely followed by the interim 100-day SMA. A deeper and sustained retracement from here should see the next contention at the May floor at 1.3549 (May 1)," Piovano adds.

On the upside, Piovano sees the next hurdle at the YTD peak of 1.4248 (June 24 and 25). The break above the latter could prompt the pair to attempt a move toward the April 2025 ceiling at 1.4414 (April 1).

“Momentum favours extra losses,” he adds, noting that the Relative Strength Index (RSI) is receding further and is revisiting the 44 region, while the Average Directional Index (ADX), just over 43, suggests the underlying trend remains pretty solid.