Canadian dollar holds gains after Bank of Canada delivers rate hike

The Canadian dollar edged higher against its U.S. counterpart on Wednesday after the Bank of Canada raised interest rates for the first time in more than three years, while signalling that further increases could be needed to contain inflationary pressures from elevated energy prices.

The U.S. dollar was last down 0.07% at C$1.4042 at 11:30 a.m. ET, leaving the Canadian dollar modestly stronger on the day. The exchange rate means one U.S. dollar buys C$1.4042.

The Bank of Canada raised its benchmark overnight interest rate by 25 basis points to 2.50%, citing the risk that persistently high energy prices could spread into broader inflation. Governor Tiff Macklem said further increases might be necessary, although policymakers would proceed cautiously given uncertainty surrounding the economic outlook.

The central bank also raised its inflation forecast for 2027 to 3.1%, from 2.0% projected in July, while forecasting economic growth of 1.0% this year, up from its previous estimate of 0.7%. The revised outlook suggests policymakers are increasingly concerned about persistent price pressures despite risks to economic growth.

The rate increase could lend support to the Canadian dollar by improving the relative appeal of Canadian-dollar assets. However, the currency’s gains may remain limited as investors assess the possibility of further tightening, the impact of U.S. trade tariffs and movements in oil prices.

The Federal Reserve is also due to announce its latest policy decision on Wednesday, leaving investors focused on the outlook for U.S. interest rates and the potential impact on the dollar. Expectations for monetary policy in both countries could drive the exchange rate as traders assess the relative attractiveness of Canadian- and U.S.-dollar assets.

Oil prices remain another important factor for the loonie because energy exports are a major component of Canada’s economy. Crude prices fell on Tuesday as traders assessed prospects for progress in Middle East peace talks, removing some support for the Canadian currency.