BoC Governor Macklem: Our estimate of neutral is centred on 2.75%

Bank of Canada (BoC) Governor Tiff Macklem discussed the central bank’s policy outlook and answered questions from the media after the BoC lowered its policy rate by 25 basis points to 2.75% at the February meeting.

BoC press conference key highlights

We are new facing a new crisis.

The uncertrainty alone is already causing harm.

I cannot say what effect on inflation a trade war would have.

It is uncertain how quickly costs pass through to inflation.

We can’t provide forward guidance.

We will do as much as we cabn to help economy adjust to US tariffs.

What we can do is limited by the need to control inflation.

We can’t lean against weaker growth and higher inflation at the same time.

We think Q1 domestic demand will be very week.

Canadians’ sentiment turned sharply.

We did not seriously consider a 50 bps rate cut.

There is a lot of unpredictability about what the US could do.

We will proceed carefully when it comes to our monetary policy.

The Canadian Dollar is reflecting what’s going on, need to take account of that in our decisions.

Our estimate of neutral is centred on 2.75%.

Trade policy is shifting every day.

In a trade war we would see lower demand. We will be watching carefully.

A rise in peoples’s medium and longer term inflation expectations would certainly be a big warning sign for us.

This section below was published at 13:45 GMT to cover the Bank of Canada’s policy announcements and the initial market reaction.

In a widely expected move, the Bank of Canada (BoC) announced on Wednesday that it was cutting its policy rate by 25 basis points to 2.75%, aligning with market forecasts.

BoC policy statement key takeaways

Heightened trade tensions and U.S. tariffs will likely increase inflationary pressures in Canada and curb growth. 

Q1 growth will likely slow as trade conflict weighs on sentiment and activity. 

Recent surveys suggest a sharp drop in consumer confidence and slowdown in business spending. 

There are warning signs that heightened trade tensions could disrupt jobs market recovery. 

Annual inflation rate expected to increase to about 2.5% in March as sales tax break ends. 

Short-term inflation expectations have risen in light of fears about impact of tariffs. 

It will carefully assess timing and strength of both downward and upwards pressures on inflation. 

It will also be closely monitoring inflation expectations. 

Economic outlook continues to be subject to more-than-usual uncertainty.

Market reaction

The Canadian Dollar picks up pace and drags USD/CAD to the 1.4400 neighbourhood folllowing the BoC’s decision to lower its policy rate by 25 basis points, as widely anticipated.

This section below was published as a preview of the Bank of Canada’s (BoC) monetary policy announcements at 09:00 GMT.

• Bank of Canada (BoC) is seen reducing its policy rate by 25 bps.
• The Canadian Dollar remains on the defensive against the US Dollar.
• Headline inflation in Canada remains below the bank’s 2% target.
• Attention will also be on Governor Macklem’s press conference.

All eyes are on the Bank of Canada (BoC) this Wednesday, with market consensus expecting another rate cut—the seventh in a row. This time, the talk is about a 25-basis-point reduction, similar to the move in January.

Meanwhile, the Canadian Dollar (CAD) has been losing some steam lately, falling from last week’s highs and nearing the 1.4500 level against the US Dollar (USD).

Adding another twist, Canada’s inflation figures are now in focus. In February, the annual inflation rate, as measured by the headline Consumer Price Index (CPI), edged up to 1.9% from 1.8%. At the same time, the BoC’s core CPI increased for the second straight month, reaching 2.1% compared to the same period in 2024, which exceeds the bank’s target.

Navigating trade turbulence: The Bank of Canada’s strategy

Further easing seems likely, though the Bank of Canada is expected to remain cautious. The central bank is balancing several factors—a recent uptick in inflation, a strong labour market and GDP levels that align with its forecasts—with the uncertainties brought on by the Donald Trump administration’s unpredictable United States (US) trade policies.

At its January meeting, Governor Tiff Macklem noted that the threat of tariffs is hard to ignore when you look outside. He explained that ensuring the economy is on solid ground before new tariffs take effect is crucial. From a risk management standpoint, this concern helped drive the decision to cut the policy rate by 25 basis points.

Regarding inflation, Macklem emphasized that while some increase was anticipated, the key was to prevent an initial rise in prices from spreading widely to other goods, services, and wages. He stressed that the aim was for inflation to eventually return to 2% rather than evolving into a persistent, harmful trend for Canadians.

Minutes released on February 12 further revealed that the Bank of Canada’s governing council was worried a prolonged trade conflict with the US could permanently shrink domestic GDP. The minutes also noted that on January 29, the BoC reduced its key policy rate to 3%—its sixth consecutive cut—in light of the potential economic risks if President Donald Trump followed through on his threat to impose tariffs on all Canadian imports.

Previewing the BoC’s interest rate decision, Taylor Schleich, Warren Lovely and Ethan Currie at the National Bank of Canada noted: “The Bank of Canada is all but assured to lower its overnight target by 25 basis points on Wednesday, the presumptive move marking the seventh straight rate cut and bringing the policy rate to the mid-point of the estimated neutral range. Unlike prior decisions though, easing will be less about absorbing already-accumulated economic slack and more about supporting an economy mired in trade conflict. Indeed, in normal times recent data would likely be consistent with holding steady on the policy rate, as GDP and jobs growth pick up and underlying inflation firms. But the Bank was already leaning dovish, Macklem stressing that trade uncertainty alone was ‘doing damage’ so it’s not clear that these data will matter much for this decision.” 

When will the BoC release its monetary policy decision, and how could it affect USD/CAD?

The Bank of Canada is set to announce its policy decision on Wednesday at 13:45 GMT, with Governor Tiff Macklem scheduled to hold a press conference at 14:30 GMT.

While major surprises are not expected, investors predict the tone of the bank’s message will remain fixated on US tariffs and their impact on the Canadian economy, a view that can extend to developments around the Canadian Dollar (CAD).

Senior Analyst Pablo Piovano from FXStreet noted that if the recovery picks up pace, USD/CAD should face initial resistance at its March peak of 1.4542 set on March 4. A breakout of the latter could pave the way for a potential test of the 2025 high at 1.4792 recorded on February 3.

Additionally, Piovano indicated that occasional bearish moves might test the March low of 1.4237 hit on March 6, seconded by the provisional 100-day SMA at 1.424 and then the 2025 bottom of 1.4150 reached on February 14.