BOC’s Dovish Shift and Trade Warnings Drag CAD Lower


As expected in our BOC Event Guide, The Bank of Canada cut interest rates by 25 basis points to 3.0%, marking the sixth consecutive rate cut since June 2024.


The central bank also officially ended its quantitative tightening program while warning about significant risks from potential U.S. trade tariffs.

Alongside the rate cut, the BOC announced plans to restart asset purchases in March, beginning with C$2-5 billion in term repo operations. Treasury bill purchases are also set to resume later this year as part of balance sheet normalization.

Link to official BOC January monetary policy statement

Growth & Labor Market

In its quarterly Monetary Policy Report (MPR), the BOC shared that it expects GDP growth to pick up from 1.3% in 2024 to 1.8% in 2025 and 2026, though the outlook was revised lower due to slower population growth and reduced immigration targets.

It also thinks the labor market remains soft, with unemployment at 6.7% in December. Job creation has strengthened after lagging labor force growth for over a year. Wage pressures remain sticky but are showing initial signs of easing, with private-sector wage growth slowing to 3.4% from 4.6% since October.

Inflation & Policy Stance

Inflation has been hovering near the 2% target since August, and the BOC expects it to stay there through 2025-26, despite short-term swings from the GST/HST holiday. The bank’s preferred core inflation measures (CPI-median and CPI-trim) remain slightly above target at 2.4% and 2.5%, but a gradual decline is expected as shelter inflation slows.

Trade Risks

President Trump’s expected February 1st tariff announcement remains a key uncertainty. The BOC’s latest MPR warns that broad-based 25% tariffs on Canadian goods would likely slow GDP growth and push inflation higher, creating a difficult policy environment. That is, the central bank may need to balance inflation risks from excess supply against upward pressure from higher import costs.

Link to official BOC January monetary policy report

In his press conference, BOC Governor Tiff Macklem highlighted three key points:

  • Inflation has stabilized
  • Previous rate cuts are boosting the economy, and
  • U.S. trade policy remains a major risk

With inflation under control and rates significantly lower, monetary policy is now better positioned to support economic adjustments. However, Macklem warned that broad-based U.S. tariffs could test Canada’s economic resilience.

Link to BOC Governor Macklem’s press conference

Market Reactions

Canadian Dollar vs. Major Currencies: 5-min

Overlay of CAD vs. Major Currencies

Overlay of CAD vs. Major Currencies Chart by TradingView

The Loonie lost ground early in the European session but staged a sharp rebound just before the BOC’s announcement.

Shortly after, the central bank’s dovish tone and Macklem’s focus on U.S. trade risks in his press conference brought renewed bearish pressure on the currency. CAD saw its biggest losses against GBP, EUR, and NZD, while reactions were more muted against USD and CHF.

By the London session close, CAD found a floor and bounced higher, likely as traders took profits ahead of the FOMC decision.