BoC pushes back on hiking bets
Both the policy statement and Governor Macklem’s introductory press conference remarks point to a “dilemma” now facing the Governing Council. On one side are the downside risks to growth, stemming from domestic economic weakness, which has become more pronounced since the start of the year. But this
The BoC held rates at 2.25% following the March policy meeting, matching consensus expectations and our own house call.
Both the policy statement and Governor Macklem’s introductory press conference remarks point to a “dilemma” now facing the Governing Council. On one side are the downside risks to growth, stemming from domestic economic weakness, which has become more pronounced since the start of the year. But this must be weighed against upside inflation pressures resulting from conflict in the Middle East. For now, that balancing act favours a wait-and-see approach, as we warned it would in our pre-event note. Still, this is arguably more dovish than markets had expected, with the loonie under pressure as a consequence.
As we warned in our recent commentary, domestic economic conditions have softened in early 2026.
While a drop in Q4 GDP can be attributed to destocking, the more recent slowdown in the macro data is more concerning, a fact that has not escaped the attention of the Governing Council. Policymakers noted that the economy is growing more slowly than expected, while price pressures have also eased faster than forecast, with headline inflation at 1.8% YoY in February. Married to a labour market that shed jobs through the first two months of the year, this points to excess supply in the economy, with slack continuing to build.
This fact appears to have given the BoC some comfort when it comes to confronting upside inflation pressures stemming from rising oil prices.
The Governor noted in his press conference that the risk of broadening price impacts “looks contained”, steering markets toward caution and a wait-and-see approach before responding with policy. Indeed, Macklem’s observation that “we would be talking about lower rates” if not for events in the Middle East, is telling.
That looks to us like a clear effort to push back on market rate expectations that more than fully priced a rate hike before year-end, prior to today’s decision.
Even so, it is also interesting that the swap implied rate path has changed little, despite today’s BoC guidance. Granted, traders modestly pared back short-run hiking bets, but one full rate rise before year-end remains fully priced. This has, in turn, helped to limit the immediate downside loonie implications, with USDCAD nudging only fractionally higher post-announcement. Given our somewhat dovish interpretation of Macklem’s comments, and the economic backdrop more broadly, we see USDCAD at risk of extending higher upon further consideration of today’s guidance.