The Bank of Canada (BoC) delivers a widely expected 25 basis points rate cut, bringing interest rates down to 3.00% on Wednesday. This reduction in rates comes at a slower pace after back-to-back 50 basis points cuts.
The Bank of Canada (BoC) noted that a full-blown trade war with the US could severely damage the Canadian economy. In fact, Governor Tiff Macklem cautioned that a prolonged and widespread tariff battle would take a heavy toll on economic activity, further clouding the country’s outlook.
While this isn’t a forecast, the BoC laid out a stark hypothetical scenario: if Canada and other nations retaliated with a 25% tariff on US goods, GDP growth could shrink by 2.5 percentage points in the first year and another 1.5 points in the second.
Against this backdrop of rising uncertainty and an economy struggling with excess supply, the BoC lowered its policy rate by another 25 basis points to 3%. Inflation remains near 2%, giving policymakers room to act. Additionally, the bank confirmed that its quantitative tightening (QT) program—which helped unwind the massive liquidity injections from the pandemic—will come to an end in March.
The central bank nudged its inflation forecast slightly higher, now expecting 2.3% in 2025 (up from 2.2%) and 2.1% in 2026 (previously 2.0%). However, these projections don’t factor in the potential impact of US tariffs, which could add further uncertainty to the outlook.
Market reaction
The Canadian Dollar weakens for the third straight day on Wednesday, sending USD/CAD to the upper end of the 1.4400 mark in the wake of the BoC’s interest rate reduction.
Canadian Dollar PRICE Today
The table below shows the percentage change of Canadian Dollar (CAD) against listed major currencies today. Canadian Dollar was the strongest against the Australian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.35% | 0.29% | -0.12% | 0.29% | 0.56% | 0.46% | 0.37% | |
| EUR | -0.35% | -0.05% | -0.45% | -0.06% | 0.21% | 0.17% | 0.02% | |
| GBP | -0.29% | 0.05% | -0.44% | -0.00% | 0.26% | 0.17% | 0.05% | |
| JPY | 0.12% | 0.45% | 0.44% | 0.44% | 0.71% | 0.60% | 0.50% | |
| CAD | -0.29% | 0.06% | 0.00% | -0.44% | 0.27% | 0.18% | 0.06% | |
| AUD | -0.56% | -0.21% | -0.26% | -0.71% | -0.27% | -0.09% | -0.21% | |
| NZD | -0.46% | -0.17% | -0.17% | -0.60% | -0.18% | 0.09% | -0.12% | |
| CHF | -0.37% | -0.02% | -0.05% | -0.50% | -0.06% | 0.21% | 0.12% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Canadian Dollar from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent CAD (base)/USD (quote).
This section below was published as a preview of the Bank of Canada’s (BoC) monetary policy decision at 09:00 GMT.
- Bank of Canada (BoC) is expected to cut 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.
- The BoC will also release its Monetary Policy Report (MPR).
The spotlight is on the Bank of Canada (BoC) this Wednesday, with widespread expectations that it will lower its policy rate for the sixth meeting in a row. This time, however, the buzz surrounds a potential 25-basis-point cut—a smaller move than in the previous couple of gatherings—which would bring the benchmark rate down to 3.00%.
Meanwhile, the Canadian Dollar (CAD) has embarked on a consolidative phase since mid-December, looking to stabilise following yearly lows north of the 1.4500 level vs. the US Dollar (USD), and the sharp depreciation that kicked in along with the so-called “Trump trade” back in October.
Canada’s inflation story adds an intriguing layer to the BoC’s rate decision. December marked the second consecutive pullback as the annual inflation rate, measured by the headline Consumer Price Index (CPI), dipped to 1.8%. Although the BoC’s core CPI edged up last month, it remains below the central bank’s goal.
Further easing appears on the cards
Despite the anticipated rate cut, the Bank of Canada is expected to maintain a bearish outlook. This sentiment comes against the backdrop of easing inflation, a softening labour market and GDP hovering close to the bank’s most recent forecasts.
In the BoC’s Business Outlook Survey published on January 20, Canadian businesses are cautiously optimistic about the year ahead. They expect better demand and stronger sales, thanks in part to recent rate cuts. However, many are keeping a wary eye on potential fallout from upcoming United States (US) policies.
According to the Minutes released on December 23, the BoC’s decision to cut rates by 50 basis points on December 11 was a tight call, with some members of the governing council leaning toward a smaller reduction. Discussions among council members revolved around whether a 50 or 25 basis point cut was the right move. Those advocating for a larger cut were particularly concerned about weaker growth projections and downside risks to inflation. However, they acknowledged that not all recent data fully supported such an aggressive move.
Ultimately, the decision to opt for a 50 basis point cut was driven by a dimmer growth outlook than anticipated in October and the recognition that monetary policy no longer needed to remain firmly restrictive.
The central bank lowered its key policy rate to 3.25% in response to slowing economic growth. Governor Tiff Macklem signaled that any future rate cuts would be more measured, marking a shift from earlier statements that emphasized the need for continuous easing to bolster the economy.
Previewing the BoC’s interest rate decision, Assistant Chief Economist at Royal Bank of Canada Nathan Janzen noted: “The Bank of Canada is expected to cut interest rates at a more gradual 25 basis-point pace on Wednesday following 50 bps cuts in each of the two prior meetings—widening a gap with US policy rates as the Federal Reserve is widely expected to forego a January rate cut… The BoC clearly communicated in its December policy decision that with the interest rate no longer at obviously ‘restrictive’ levels, the pace of future rate cuts would likely be more gradual, and contingent on economic data… We continue to expect the BoC will ultimately need to cut the overnight rate to a slightly stimulative 2% this year.”
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 14:45 GMT, followed by a press conference from Governor Tiff Macklem at 15:30 GMT. While no major surprises are expected, market focus will likely be on the central bank’s tone, which could have a bigger influence on the Canadian Dollar (CAD) than the actual rate decision.
Pablo Piovano, Senior Analyst at FXStreet, highlights that USD/CAD now appears sidelined in the upper end of the recent range, following a strong upward trajectory in place since October, with the pair reaching a 2025 peak at 1.4516 on January 21.
Looking ahead, Pablo notes: “The next key target is the 2020 high at 1.4667, recorded on March 20.”
He also points out potential downside levels, saying: “Occasional bearish moves could push USD/CAD to test the 2025 bottom of 1.4260 (January 20), while provisional contention emerges at the 55-day and 100-day SMAs at 1.4226, and 1.3989, respectively.
Economic Indicator
BoC Monetary Policy Report
A quarterly diagnostic review of the health of the Canadian economy, The Bank of Canada Monetary Policy Report is a study of the Canadian economy, including forecasts for all key metrics, as well as an assessment of future risks. Any changes in this report tend to affect Canadian Dollar (CAD) volatility. If the BoC presents a hawkish outlook, that is seen as bullish for CAD, while a dovish outlook is seen as bearish.
Read more.
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.
