Canadian Dollar Resilient on Trade War Inflation Fears, BoC Cuts Rates to 2.75%

March 12, 2025 - Written by David Woodsmith

STORY LINK Canadian Dollar Resilient on Trade War Inflation Fears, BoC Cuts Rates to 2.75%

The Bank of Canada (BoC) warning over inflation was slightly more hawkish than expected and provided some Canadian dollar support after the latest interest rate cut, although trading conditions remained volatile given the on-going trade war with the US.

According to Governor Tiff Macklem "We ended 2024 on a solid economic footing. But we're now facing a new crisis."

Macklem added; "Depending on the extent and duration of new U.S. tariffs, the economic impact could be severe. The uncertainty alone is already causing harm.”

The Dollar to Canadian dollar (USD/CAD) exchange rate traded around 1.4420.

The Pound to Canadian dollar (GBP/CAD) exchange rate retreated to near 1.8650 from 8-year highs above 1.8770 on Tuesday.

RBC Capital Markets (RBC) has an end-2025 GBP/CAD forecast of 1.79.

According to Scotiabank; “Price signals suggest some resiliency in the CAD despite all the recent volatility in the market.”

The Bank of Canada lowered interest rates by a further 25 basis-points to 2.75% at the latest meeting, in line with consensus forecasts and the seventh successive decline from the 5.00% peak.

US President Trump has imposed a 25% tariff on steel and aluminium imports from Canada after an interim threat to increase tariffs to 50% was removed.

There is a very high degree of uncertainty over the outlook.

MUFG noted; “It’s important to note that this action with such a large downstream impact is very different in scale than the tariffs in 2018.”

The Canadian central bank noted the impact of tariffs on the economy; “While economic growth has come in stronger than expected, the pervasive uncertainty created by continuously changing US tariff threats is restraining consumers’ spending intentions and businesses’ plans to hire and invest.”

On the policy outlook, the bank commented; “Monetary policy cannot offset the impacts of a trade war. What it can and must do is ensure that higher prices do not lead to ongoing inflation.”

It added; “Governing Council will be carefully assessing the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.”

According to Scotiabank vice president of capital markets Derek Holt; "I think they may be signaling they're done. The final paragraph was quite hawkish. They're saying in so many words that 2% (inflation) is their job and they're more worried about upside than downside risks to that target coming from the trade tensions with the United States."

ING expects a tough stance on trade; “The upcoming electoral campaign in Canada will focus on the tariff response, and indications of growing anti-US sentiment means both the Conservatives (which are leading in polls) and the Liberals (now led by Mark Carney) will retain a rather hawkish stance on trade.”

It added; “We have been bullish on USD/CAD, and still favour a structural move above 1.45 on the back of US protectionism.”

Danske Bank, however, expects Canadian dollar gains; “We forecast USD/CAD to tick down to 1.41 in the near term, given stretched short CAD positioning and further USD-weakness.”

RBC Capital Markets (RBC) noted the high degree of uncertainty. According to the bank; “Our base case sees a CAD recovery vs USD and a break of 1.40 in 2026, as the monetary easing delivered by the BoC should support a growth rebound by end-2025.”

It did, however, note high risks to the outlook; “If significant tariffs are re-imposed on Canada in April for more than a few months, then 1.50+ will have to be considered.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Canadian Dollar Forecasts Pound Canadian Dollar Forecasts