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The Canadian dollar softened after the Bank of Canada held rates and signalled no urgency to tighten policy despite elevated inflation risks.
The Bank left its policy rate unchanged at 2.25%, pointing to a "clouded outlook" shaped by higher energy prices, ongoing economic slack and uncertainty about Canada-U.S. trade policy.
The Bank said it will "not let higher energy prices become persistent inflation," a signal it is prepared to act if needed, but stopped short of indicating any near-term move.
Regarding the inflation outlook, the Bank sees inflation rising in the near term but still expects it to return to target, while growth remains soft and spare capacity only gradually absorbed.
It also noted “little evidence” so far of spillover into core inflation.
Markets took that as a lack of urgency that limits the odds of a rate rise in the coming months. For the Canadian dollar, that's a 'dovish' signal.
“USD/CAD briefly traded on the strong side after today’s BoC announcement, although market pricing didn’t shift meaningfully,” says Francesco Pesole at ING, adding that the “relatively dovish BoC” supports a near-term move higher in the pair.
Avery Shenfeld at Canadian lender CIBC says the Bank is balancing “elevated inflation” against “sluggish growth and excessive slack,” creating a two-way risk that is “keeping interest rates frozen in place.”
That leaves policy without a clear directional bias: if energy-driven inflation persists, rates could rise and if growth weakens further, cuts come into play.
For now, the Bank is signalling patience, with Shenfeld noting that any future adjustments "can be expected to be small."
That keeps the Canadian dollar sensitive to external drivers such as oil prices, equity markets and developments around USMCA negotiations, rather than a strong domestic policy impulse.
