The Bank of Canada kept its policy rate unchanged at 2.25% at 13:45 GMT, followed by a press conference at 14:30 GMT. Governor Tiff Macklem said higher energy prices for longer could lead to a rate rise, but there is no set timeline.
Macklem said the bank sees some slack in the economy and does not expect energy costs to be quickly passed into wider prices. He said there is a risk inflation expectations are not as well anchored as before Covid, while confidence in the bank’s credibility has not been eroded.
Policy Signals And Market Implications
Senior Deputy Governor Carolyn Rogers said trade tensions pose a larger longer-term risk than higher oil prices. She also said there is no single inflation number that would fully change the bank’s view.
In its projections, the BoC sees growth at 1.2% in 2026 (1.1% in January), 1.6% in 2027, and 1.7% in 2028. Inflation is expected to average 2.3% in 2026 (2.0% previously), then 2.1% in 2027 and 2.0% in 2028.
The output gap in Q1 is put at -1.5% to -0.5%, and annualised GDP growth is forecast at 1.5% in Q1 and 1.5% in Q2. Assumptions include oil falling to $75 per barrel by mid-2027, a neutral rate range of 2.25% to 3.25%, and wage growth of 3% to 3.5%.
After the decision, USD/CAD moved above 1.3700. Reuters reported 76% of polled analysts expect no change in policy in 2026.
Trading Outlook And Key Watch Items
The Bank of Canada is signaling it will remain on the sidelines, creating a period of uncertainty for the Canadian dollar. Governor Macklem’s concern that inflation expectations are becoming unanchored suggests a hawkish bias is simmering beneath the surface. This wait-and-see approach means we should prepare for range-bound trading in the near term but be ready for a sharp move on new data.
We must closely watch energy markets, as Macklem explicitly linked a potential rate hike to sustained higher oil prices. With West Texas Intermediate crude recently touching $92 a barrel due to the ongoing US-Iran conflict, the Bank’s assumption of a decline to $75 looks increasingly optimistic. Any further supply disruption would challenge the Bank’s patience and could trigger a rapid repricing of rate hike odds.
Domestically, inflation remains the primary concern, even with economic growth looking soft at a projected 1.2% this year. Looking back at the first quarter data from 2026, shelter inflation remained stubbornly high at 6.1% year-over-year, a trend that continues to pressure the headline number. The next CPI release will be critical, as another reading above the Bank’s 2.3% forecast for the year would shorten the odds of a more aggressive policy stance.
Given this backdrop, we see value in options strategies that benefit from either a sudden spike in volatility or a continued sideways grind. Buying straddles or strangles on USD/CAD could be an effective way to position for a breakout triggered by oil prices or a surprise inflation report. For those expecting the current holding pattern to continue, selling iron condors could capture premium as the currency pair remains contained.
The policy divergence with the U.S. Federal Reserve remains a key driver putting upward pressure on the USD/CAD pair. The Fed’s policy rate sitting at 3.00% versus our 2.25% makes holding U.S. dollars more attractive, supporting the pair above the 1.3700 level. Until the Bank of Canada signals a clear intent to close this gap, any dips in USD/CAD are likely to be viewed as buying opportunities.
