The Bank of Canada (BoC) decided yesterday to keep interest rates unchanged and stressed that it would wait to see the impact of the US tariffs. Like so many central banks, it noted in its statement that uncertainty is exceptionally high at the moment and that it is not possible to predict which tariffs will ultimately remain in place for an extended period of time, Commerzbank's FX analyst Michael Pfister notes.

The risks to the BoC are tilted to the downside

"The usual forecasts that would have accompanied the new monetary policy report were not published in this form. Instead, the BoC sees two possible scenarios for the future: one that involves a great deal of uncertainty, but in which the tariffs are ultimately averted through negotiations."

"In such a scenario, growth would be somewhat lower in the near term, but inflation would likely remain around the midpoint of the inflation target. And a scenario in which a full-blown trade war breaks out, inflation rises above 3% next year, and Canada falls into recession this year."

"It is difficult to say which scenario will ultimately prevail. In the optimistic scenario, the BoC should have no problem keeping rates at this level for an extended period. In the much more pessimistic scenario, we are likely to see several rate cuts this year. The risks to the BoC are therefore tilted to the downside. We would therefore remain cautious about pushing the CAD's recovery too far until the uncertainty has abated somewhat."

Source: Fxstreet