Not Much Impact in Canadian Dollar From Bank of Canada's Rate Cut, Says ING

12:29 PM EDT, 10/29/2025 (MT Newswires) -- As widely anticipated, the Bank of Canada cut its policy rate by a further 25bps to 2.25% on Wednesday, citing "US trade actions and related uncertainty" that are "having severe effects on targeted sectors including autos, steel, aluminium, and lumber," said ING.

Gross domestic product contracted 1.6% in Q2 and "growth is expected to be weak in the second half of the year" as well.

The central bank acknowledges that government support is coming, but the jobs market "remains soft" with the unemployment rate at a four-year high of 7.1%. The growth outlook is predicted to remain subdued in its forecasts, with the economy projected to expand 1.2% this year, 1.1% in 2026 and 1.6% in 2027, versus Bloomberg consensus projections of 1.2%, 1.2% and 1.9% respectively, noted the bank.

Inflation has come in a little higher than the BoC predicted a few months ago, but given the issues surrounding economic activity - remember three quarters of Canada's exports go to the United States and the Canadian consumer is amongst the most indebted between developed market peers -- inflation is expected to "ease in the months ahead."

After 275bps of rate cuts, the BoC now believes that the current policy rate is "at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment." This suggests that it will likely hold rates steady at the next policy meeting in December -- but given the acknowledgement of the "difficult transition" the economy is facing, the risks remain skewed towards at least one additional cut in early 2026, added ING.

Currently, the market is pricing a 50-50 chance of such action by April.

The Canadian dollar (CAD or loonie) wasn't hugely impacted by Wednesday's decision, pointed out the bank. USD/CAD has broadly followed the US dollar's (USD) daily moves on Wednesday, with only a modest bullish CAD addition following the BoC's announcement.

The loonie has shown good resilience to negative U.S.-Canada trade news, and a cautious stance from the BoC on further easing has underpinned its decent momentum. Nevertheless, downside risks for CAD remain "substantial," as further deterioration in trade relationships and/or economic data can prompt more dovish bets on the BoC, given that it has failed to shut the door to more easing, according to ING.

The bank target remains 1.38 for USD/CAD year-end, but that mirrors USD weakness rather than CAD strength. Instead, ING sees more upside potential for EUR/CAD and, in general, other G10 currencies versus the loonie.

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