The Bank of Canada raised its key rate by 25 basis points to 2.50% for the first time in three years. The Canadian dollar strengthened slightly against the US dollar following this decision.
The Bank of Canada raised the overnight base interest rate by 25 basis points to 2.50%. This is the first increase in more than three years. The decision was made to curb inflation caused by high energy prices. The regulator noted that further increases may be needed, but actions will be cautious due to uncertainty in economic prospects.
As of 18:30, the US dollar rate fell by 0.07% and amounted to C$1.4042. The Canadian dollar thus strengthened slightly during the day. Bank of Canada Governor Tiff Macklem pointed to the risk of broader inflation growth amid sustained energy prices.
The central bank revised its inflation forecast for 2027 upward — to 3.1% from the previous 2.0%. The economic growth forecast for the current year was increased to 1.0% from 0.7%. These changes reflect growing concerns about persistent inflationary pressure.
The rate hike could support the Canadian dollar due to greater attractiveness of assets in this currency. However, further growth in the exchange rate may be limited due to investors' assessment of policy tightening prospects, the impact of US trade tariffs, and oil price dynamics.
On Wednesday, the US Federal Reserve is expected to decide on rates. Traders compare the monetary policy prospects of the two countries, which affects the exchange rate. Oil prices remain an important factor for the Canadian dollar, as energy exports play a significant role in Canada's economy. On Tuesday, oil prices fell amid negotiations in the Middle East.