The Bank of Canada (BoC) maintained its policy rate at 2.25%, as widely anticipated, and removed guidance suggesting the current rate is appropriate, signaling a cautious stance amid softer economic data since January [1][2]. TD Securities strategists noted that growth risks are now tilted to the downside, while inflation risks are tilted to the upside, with near-term policy risks skewed toward easing unless a prolonged Middle East conflict forces a reassessment [1]. Governor Tiff Macklem stated, 'We can raise rates if we see signs that energy prices are going to cause persistent inflation,' but also indicated that if energy prices decline and economic weakness persists, the BoC could lower its policy rate [2]. Macklem highlighted ongoing uncertainty tied to US trade policy and geopolitical risks, warning that the US-Israel war with Iran is pushing oil prices higher and could lift inflation in the near term. He emphasized that the Governing Council will look through the war’s near-term impact on inflation but will not allow persistent effects from elevated energy prices [2].
Market reaction saw the USD/CAD pair trading around 1.3701, with the Canadian Dollar finding some support after the BoC announcement, though lacking follow-through selling as the US Dollar remained firm ahead of the Federal Reserve’s (Fed) interest rate decision [2]. TD Securities strategists commented that CAD is favored versus non-USD peers due to its lower beta to risk-off, oil links, and terms of trade boost, but expect USDCAD to move higher if the conflict extends, with rates and growth differentials favoring the US [1].
Attention now shifts to the Fed, which is expected to keep rates unchanged at its March FOMC meeting, with no cut anticipated today and the first reduction fully priced by year-end [3]. ING’s Benjamin Schroeder expects slightly weaker growth forecasts, higher inflation projections, and a postponement of the 2026 rate cut to 2027 [3]. Markets are watching for updated forecasts, including the Dot Plot, and Chair Powell’s press conference, as higher oil prices and elevated inflation expectations constrain policy [3]. The Fed’s balance sheet management is also under scrutiny, with the monthly US$40bn pace of reserve management purchases expected to be reduced in April [3].
Analysts from TD Securities and ING both highlight the challenges posed by volatile energy prices and geopolitical risks, with central banks maintaining a cautious approach and signaling readiness to respond as needed [1][2][3].
CONCLUSION
The Bank of Canada’s dovish hold and removal of forward guidance reflect heightened uncertainty and inflation risks, while the Federal Reserve is expected to maintain rates amid similar concerns. Market sentiment remains cautious, with both central banks signaling flexibility in response to evolving geopolitical and economic conditions. Investors are closely watching upcoming Fed communications for further clarity on the monetary policy outlook.