As expected in our BOC Event Guide, the Bank of Canada cut its policy rate by 25 basis points to 2.75% on Wednesday, marking its seventh consecutive rate reduction since June 2024.
This decision came amid escalating U.S.-Canada trade tensions, with the U.S. implementing 25% tariffs on Canadian steel and aluminum products the same day.
Key Points from BOC’s Event
- BOC cut the overnight rate by 25bps to 2.75%
- Some officials had discussed leaving rates unchanged at 3%
- Economy entered 2025 in “solid position” with robust Q4 growth of 2.6%
- Inflation remains close to the 2% target
- U.S. tariffs expected to slow economic activity while increasing inflation
- Short-term inflation expectations have risen, prompting concerns
- “Monetary policy cannot offset the impacts of a trade war”
- BOC is committed to ensuring higher prices don’t lead to ongoing inflation
Link to official BOC March monetary policy statement
In his presser, Governor Macklem stressed that while monetary policy cannot offset a trade war’s direct impacts, the central bank must ensure higher prices don’t lead to ongoing inflation, warning that Canada is “facing a new crisis” as tariffs threaten both economic growth and price stability.
The BOC head honcho shared that some officials had discussed leaving rates unchanged at 3%, as “growth has been stronger than we expected,” but concerns about trade impacts on confidence ultimately tipped the scales toward easing.
Other highlights from BOC press conference
- “We’re going to get weaker economic activity. We’re going to get higher prices, higher inflation.“
- Forward guidance is impossible in the current frequently-changing economic backdrop
- “Critically important” that medium and longer-term inflation expectations remain well anchored
- No serious thought given to a half-point rate cut despite trade tensions
- Will “proceed carefully” to assess both upward inflation pressures from costs and downward pressure from demand
- BOC polling shows sharp drop in consumer and business confidence
- Special surveys found workers in trade-exposed sectors feel most vulnerable to job losses
Link to BOC Governor Macklem’s press conference
Looking ahead, economists expect more interest rate cuts, with some seeing policy easing toward 2% as policymakers go all in to support an economy facing potential headwinds from a prolonged trade conflict with its biggest trading partner.
Market Reactions
Canadian Dollar vs. Major Currencies: 5-min
Overlay of CAD vs. Major Currencies Chart by TradingView
The Canadian dollar, which had been trading strongly since the European session open, dropped at the start of the U.S. session, possibly as traders took profits ahead of BOC’s decision.
Then, in a bit of a curveball, CAD initially strengthened after the rate cut, likely a reaction to the central bank’s relatively hawkish tone on inflation risks.
Right after the announcement, CAD performed best against EUR and CHF, while showing mixed reaction against the other majors. During Macklem’s press conference, his focus on inflation monitoring gave the Loonie some extra short-term support.
By mid-session, most CAD pairs had settled after the initial volatility. The currency held onto its gains against major pairs, with CAD/EUR standing out as particularly strong, while CAD/AUD lagged a bit.
