On Wednesday, markets are preparing for the Bank of Canada’s (BoC) interest rate announcement at 17:45 (GMT+4). The decision will be carefully monitored as Canada navigates the economic uncertainty caused by US tariffs and poor jobs data recently.
With inflation rebounding above the central bank’s target and trade concerns on the horizon, the BoC’s next move is critical.
What’s been happening in Canada?
Since June 2024, the BoC has been easing policy. Its most recent moves include a 25-basis point cut to 3% in January 2025 and another in March 2025, bringing the overnight rate down to 2.75%.
These rate cuts reflect the central bank’s response to global trade difficulties, particularly US-imposed tariffs that threaten Canada’s export-driven economy. ⁽¹⁾
Now that inflation has risen back above 2% again, the emphasis is on bolstering growth despite external pressure. A year ago, the overnight rate was at 5% as the BoC sought to combat rising inflation. ⁽²⁾
The BoC could either announce another 25-basis point cut tomorrow or hold steady. The March jobs report, which showed a loss of 28,000 jobs, is a key factor tilting the odds toward a cut.
The weak jobs report could present downside risks to the economy, which may warrant further action from the Bank of Canada. ⁽³⁾
Factors Influencing the BoC’s Decision
Several factors have shaped the BoC’s “wait-and-see” strategy. Canada’s economy has shown resilience in the face of recent job losses, as evidenced by its solid vehicle sales, good growth, and increased consumer spending before the tariff escalation.
These factors have caused inflation to go up as increased demand drives higher prices. The March 2025 CPI report from the BoC revealed growing consumer concerns about trade conflicts, with expectations of a higher cost of living pushing short-term inflation forecasts up in Q1 2025. ⁽⁴⁾
US tariffs, including a 25% levy on Canadian cars and light trucks, along with similar tariffs on steel and aluminum, are already raising production costs.
The BoC might view further rate cuts as “insurance” against long-term economic damage from tariffs, especially given emerging labor market weakness. However, the uptick in inflation could prompt a pause to avoid overstimulating the economy.
Potential Impact of a Rate Cut
A rate cut could put pressure on the Canadian Dollar due to trade tariff concerns following the rate cuts that occurred in January and March of this year. This weakness could also come from a stronger US dollar as markets consider Canada’s economic difficulties. ⁽⁴⁾
USD/CAD Price Chart. Source: TradingView
The highlighted areas show how the CAD performed since the BoC started cutting rates from September 2024.
Potential Impact of a Rate Hold
With the BoC focusing on fighting inflation, a rate hold may offer the Canadian dollar some minor support. Gains could be limited, however, if trade tensions between the United States and Canada persist and the US dollar remains high.
