Bank of Canada Rate Cut Decision: Potential Impact on the Canadian Dollar

April 16, 2025

Ottawa, Canada – The Bank of Canada (BoC) is set to announce its latest interest rate decision today, April 16, 2025, alongside its quarterly Monetary Policy Report (MPR), a move that could significantly influence the Canadian dollar (CAD), also known as the loonie. Following a series of seven consecutive rate cuts since June 2024, bringing the policy rate from 5% to 2.75%, markets are divided on whether the BoC will cut again by 25 basis points to 2.5% or pause its easing cycle amid trade tensions and inflationary pressures. Analysts warn that the decision, shaped by U.S. tariff uncertainties and domestic economic signals, could sway the CAD’s value, already near a five-month high of 72 US cents. This article explores the potential outcomes and their implications for the loonie, drawing from recent economic analyses and market sentiment.

Context: Recent Rate Cuts and CAD Performance

The BoC’s aggressive easing, including 50-basis-point cuts in October and December 2024, has aimed to stimulate growth as inflation stabilized around the 2% target. Despite these cuts, the CAD has shown resilience, climbing from below 70 US cents in March to over 72 US cents recently, per The Globe and Mail. This strength partly reflects markets pricing in trade war risks and a pause in U.S. tariffs, which has eased pressure on imports. However, the loonie remains vulnerable to policy divergence with the U.S. Federal Reserve, whose rate stands at 4.25%–4.5%, and to trade disruptions from President Donald Trump’s on-again, off-again tariff threats.

The BoC’s latest cut on March 12, 2025, lowered the rate to 2.75%, with Governor Tiff Macklem citing tariff uncertainty and weaker business spending as drags on growth, per CBC News. The CAD gained 0.2% post-decision, trading at 1.4403 to the USD, as markets interpreted Macklem’s focus on inflation control as hawkish, reducing expectations for deeper cuts. Money markets now peg a 45% chance of a 25-basis-point cut today, up from 40% last week, per Reuters.

Potential Scenarios and CAD Impact

1. 25-Basis-Point Rate Cut to 2.5%:

• Impact on CAD: A cut could weaken the loonie, as lower rates widen the gap with U.S. rates, making Canadian assets less attractive. Global News notes that past cuts have pressured the CAD, with a 50-basis-point cut in December 2024 briefly pushing it to 70.5 US cents. A weaker loonie would raise import costs, fueling inflation on goods like groceries, a sensitive issue for consumers, as BMO’s Benjamin Reitzes warned.
• Rationale: Analysts like CIBC’s Avery Shenfeld argue for a cut, citing downside risks from a softening job market (33,000 jobs lost in March 2025) and subdued GDP growth (1% in Q3 2024, below forecasts). The MPR’s expected downward growth revision could justify easing to spur spending, per Morningstar.
• Market View: BNN Bloomberg reports traders see a “coin flip” for a cut, with swaps reflecting heightened expectations after weak labor data. A cut might signal ongoing stimulus, potentially dropping the CAD to 70–71 US cents if markets perceive over-easing.

1. Pause at 2.75%:

• Impact on CAD: Holding rates steady could bolster the loonie, signaling confidence in growth and caution against tariff-driven inflation. Financial Post noted the CAD rallied after December’s cut when Macklem hinted at a slower pace, suggesting a pause might push it toward 73 US cents. A stronger CAD would ease import costs, helping consumers but pressuring exporters.
• Rationale: Rising inflation (2.6% in February 2025, up from 1.9% in January) and a temporary GST holiday’s end could make the BoC wary of fueling price pressures, per Reuters. Macklem’s March remarks emphasized guarding against “persistent inflation” from tariffs and a weak CAD, supporting a pause.
• Market View: The Globe and Mail highlights a 60% market expectation for no cut, reflecting fears of stagflation—a mix of weak growth and high prices—amid trade wars. A pause might be seen as prudent, stabilizing the CAD unless tariff news shifts sentiment.

1. Unlikely Scenarios:

• A larger cut (50 basis points) is improbable after Macklem’s shift to “gradual” easing, per CBC News. It could tank the CAD to 4.5-year lows (below 70 US cents), risking sharp inflation spikes.
• A rate hike, absent since 2023, is off the table given excess supply and unemployment at 6.8%, per Morningstar.

Broader Economic Factors

• Trade War Uncertainty: Trump’s tariff threats, briefly imposed then paused, have clouded forecasts. A 25% tariff on Canadian exports could slash GDP by 2.5% in year one, per the BoC’s January MPR, weakening the CAD long-term. Canada’s retaliatory tariffs, announced by PM Mark Carney, aim to limit escalation, supporting CAD stability, per Financial Post.
• Inflation Dynamics: Tariffs and a weaker loonie drive cost-push inflation, unlike demand-driven spikes the BoC typically counters with hikes. True North Mortgage warns that raising rates now risks stagflation, favoring cuts or pauses to balance growth.
• U.S. Influence: The Fed’s slower easing pace strengthens the USD, pressuring the CAD. Global News notes the loonie’s 6.5% yearly decline reflects this gap, with further cuts risking more divergence.

Critical Perspective

The narrative around CAD volatility often overstates rate cuts’ immediate impact while underplaying structural issues. The loonie’s recent strength suggests markets have priced in tariff risks, and a modest cut may not trigger a plunge unless paired with bearish MPR forecasts. However, the BoC’s data-dependent stance, avoiding firm guidance, invites volatility, as Reuters notes its shift from single forecasts to ranges. Critics arguing for a pause ignore labor market weakness (highest unemployment since 2017, excluding COVID), which demands stimulus. Yet, those pushing cuts risk underestimating tariff-driven inflation, which Macklem can’t fully “smooth” with rates alone, per Global News. The CAD’s fate hinges less on today’s decision than on U.S. trade policy clarity.

Conclusion

The BoC’s April 16 decision—cut or pause—will ripple through the CAD’s value. A 25-basis-point cut to 2.5% risks modest loonie weakening, potentially to 70–71 US cents, raising import costs but supporting growth. A pause at 2.75% could lift it toward 73 US cents, easing consumer prices but signaling inflation fears. With markets split (45% for a cut, 60% for a hold), the MPR’s tone and tariff updates will amplify the impact. The CAD’s resilience, bolstered by Canada’s trade countermeasures, faces tests from U.S. policy and global markets. For updates, visit www.bankofcanada.ca or www.globeandmail.com.