The Bank of Canada will keep its 2% inflation target during the monetary policy review next year. Right now, the economy faces challenges due to new U.S. tariffs and unpredictable policies from the U.S. These factors have made the economy less efficient and created more uncertainty. Supply issues might lead to higher inflation in the future. The Bank of Canada uses different scenarios to make monetary policy choices that address various economic situations.

Commitment To The Inflation Target

Even with the complexities from U.S. tariffs, the aim for a 2% inflation target remains strong. The outlook points to potentially higher inflation. The Bank of Canada is indicating that it will stick to its 2% inflation target. Recent data shows that the Consumer Price Index (CPI) for July 2025 was at 2.9%, making a rate cut unlikely soon. This suggests that there won’t be significant decreases in interest rates for the rest of the year. Uncertainty around U.S. trade policy makes the situation tougher, adding unpredictability to monetary policy. While these trade challenges increase inflation, they also slow down growth, putting the Bank in a tough spot. As a result, we can expect greater fluctuations in both Canadian interest rates and currency markets in the coming weeks.

Impact On The Canadian Dollar

This conflict in policy is likely to put pressure on the Canadian dollar. Typically, a strict monetary policy would support the currency, but ongoing trade disputes limit any significant increases in value. We saw a similar pattern during the trade disputes of 2018-2019. Expect the USDCAD pair to trade within a range, but be aware of the potential for sudden changes with new tariff announcements. Because the Bank uses a data-driven “scenario” approach, it makes sense to use trading strategies that focus on price movements rather than direction. Buying straddles or strangles on currency futures before the next inflation report or U.S. trade announcements could be a smart way to prepare for expected fluctuations. The cost of these options has already risen about 10% this month, reflecting this increased uncertainty. Create your live VT Markets account and start trading now.

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