BoC expected to trim interest rate again amid US trade war

• Bank of Canada (BoC) is seen reducing its policy rate by 25 bps.
• The Canadian Dollar remains on the defensive against the US Dollar.
• Headline inflation in Canada remains below the bank's 2% target.
• Attention will also be on Governor Macklem's press conference.

All eyes are on the Bank of Canada (BoC) this Wednesday, with market consensus expecting another rate cut--the seventh in a row. This time, the talk is about a 25-basis-point reduction, similar to the move in January.

Meanwhile, the Canadian Dollar (CAD) has been losing some steam lately, falling from last week's highs and nearing the 1.4500 level against the US Dollar (USD).

Adding another twist, Canada's inflation figures are now in focus. In February, the annual inflation rate, as measured by the headline Consumer Price Index (CPI), edged up to 1.9% from 1.8%. At the same time, the BoC's core CPI increased for the second straight month, reaching 2.1% compared to the same period in 2024, which exceeds the bank's target.

Navigating trade turbulence: The Bank of Canada's strategy

Further easing seems likely, though the Bank of Canada is expected to remain cautious. The central bank is balancing several factors--a recent uptick in inflation, a strong labour market and GDP levels that align with its forecasts--with the uncertainties brought on by the Donald Trump administration's unpredictable United States (US) trade policies.

At its January meeting, Governor Tiff Macklem noted that the threat of tariffs is hard to ignore when you look outside. He explained that ensuring the economy is on solid ground before new tariffs take effect is crucial. From a risk management standpoint, this concern helped drive the decision to cut the policy rate by 25 basis points.

Regarding inflation, Macklem emphasized that while some increase was anticipated, the key was to prevent an initial rise in prices from spreading widely to other goods, services, and wages. He stressed that the aim was for inflation to eventually return to 2% rather than evolving into a persistent, harmful trend for Canadians.

Minutes released on February 12 further revealed that the Bank of Canada's governing council was worried a prolonged trade conflict with the US could permanently shrink domestic GDP. The minutes also noted that on January 29, the BoC reduced its key policy rate to 3%--its sixth consecutive cut--in light of the potential economic risks if President Donald Trump followed through on his threat to impose tariffs on all Canadian imports.

Previewing the BoC's interest rate decision, Taylor Schleich, Warren Lovely and Ethan Currie at the National Bank of Canada noted: "The Bank of Canada is all but assured to lower its overnight target by 25 basis points on Wednesday, the presumptive move marking the seventh straight rate cut and bringing the policy rate to the mid-point of the estimated neutral range. Unlike prior decisions though, easing will be less about absorbing already-accumulated economic slack and more about supporting an economy mired in trade conflict. Indeed, in normal times recent data would likely be consistent with holding steady on the policy rate, as GDP and jobs growth pick up and underlying inflation firms. But the Bank was already leaning dovish, Macklem stressing that trade uncertainty alone was 'doing damage' so it's not clear that these data will matter much for this decision." 

When will the BoC release its monetary policy decision, and how could it affect USD/CAD?

The Bank of Canada is set to announce its policy decision on Wednesday at 13:45 GMT, with Governor Tiff Macklem scheduled to hold a press conference at 14:30 GMT.

While major surprises are not expected, investors predict the tone of the bank's message will remain fixated on US tariffs and their impact on the Canadian economy, a view that can extend to developments around the Canadian Dollar (CAD).

Senior Analyst Pablo Piovano from FXStreet noted that if the recovery picks up pace, USD/CAD should face initial resistance at its March peak of 1.4542 set on March 4. A breakout of the latter could pave the way for a potential test of the 2025 high at 1.4792 recorded on February 3.

Additionally, Piovano indicated that occasional bearish moves might test the March low of 1.4237 hit on March 6, seconded by the provisional 100-day SMA at 1.424 and then the 2025 bottom of 1.4150 reached on February 14.