- Bank of Canada holds interest rates steady at 2.75% amid US tariff uncertainty.
- BoC outlines potential scenarios: limited tariffs vs. full trade war with varying economic impacts.
- Market anticipates possible rate cuts from BoC in upcoming meetings.
dropped closer to 1.3875 after the Bank of Canada () decided to keep its interest rate at 2.75%. Before the meeting, markets were divided, with a 45% chance that the bank would keep rates unchanged.
This is the first hold by the BoC following 2.25 percentage points of cuts in seven consecutive decisions.
The governing council said the uncertainty around the size of US tariffs creates risks for slower growth and pushes inflation higher, making them cautious about further lowering interest rates. This uncertainty comes from the lack of a clear US tariff plan. Because of this, the Bank of Canada outlined two possible scenarios in its latest report.
If the US places only limited tariffs on Canada, the BoC expects the economy to slow for a short time, with staying close to its 2% target. However, if the US starts a full trade war with both Canada and China, the BoC predicts a recession this year with inflation rising to about 3%.
In both tariff scenarios, the nominal neutral interest rate is estimated to be in the midpoint of a 2.25% to 3.25% range according to the BoC.
Beyond that the BoC monetary policy report does not provide economic forecasts, citing the uncertainty generated by US tariffs.
The Bank of Canada received a good surprise yesterday as inflation numbers came in softer than expected. The BoC did mention today that in April, inflation will be pulled down for one year by the removal of the consumer carbon tax, lower oil prices will also dampen inflation.
The Bank attributed higher inflation over the past few months to a rebound in goods price inflation and the end to the temporary suspension of sales tax.
Governor Macklem for his part stated that total CPI inflation was expected to be about 1.5% in April. The elimination of consumer carbon tax will cut CPI inflation by 0.7 percentage points for a year.
Outlook Moving Forward
The Bank of Canada noted that Short-term inflation expectations went up in the first quarter.
Both businesses and households believe the trade conflict will lead to higher prices. Some businesses have already noticed rising costs and think they will keep increasing. However, expectations for long-term inflation have stayed mostly the same.
Source: BoC Monetary Policy Report
Governor Macklem noted that If we find ourselves in a protracted trade war, we will see opposing forces on inflation.
The market reaction after the decision shows markets are still 50/50 on whether the BoC will hold rates at its June meeting but is already pricing in a cut from the Central Bank in July.
Source: LSEG
Personally I am expecting this pause to be temporary with more rate cuts expected because the risks point to slower economic growth. Removing the carbon tax will lower inflation over the next year, which will ease the impact of higher tariffs on American goods. This paves the way for 25 basis point rate cuts in the Bank of Canada’s next two meetings in June and July.
Looking ahead and later today there is a speech by Fed Chair Jerome Powell which should give markets more clues on the Federal Reserve outlook and monetary policy moving forward. This could stoke some short-term volatility for USD/CAD.
Technical Analysis – USD/CAD
USD/CAD is another pair which has largely been driven by the weaker US Dollar of late.
The fact that the Canadian Dollar has gained ground despite Oil prices hitting their lowest levels in two years further underpins this narrative (given the correlation between the two).
Price is currently trading below the 200-day MA having broken below on April 10. This is the first time USD/CAD is trading below its 200-day MA since October 2024.
For now, I expect the 200-day MA to be a particularly strong area of resistance as it lines up with the 1.4000 psychological handle as well.
Yesterday it appeared that USD/CAD may have bottomed out as price action printed a morningstar candlestick pattern which is a strong bullish reversal pattern.
If the lows hold today there is a chance we can push higher tomorrow and possibly retest the 1.4000 handle before continuing lower.
Beyond the 1.4000 we have resistance at 1.4093 and 1.4172.
Immediate support rests at 1.3854 with a break of this opening up a retest of 1.3793 and 1.3736.
USD/CAD Daily Chart, April 16, 2025
Source: TradingView.com
