MUFG Says Bank of Canada Set to Hold Rates on Wednesday Amid Resilient Canadian Dollar

07:07 AM EDT, 03/18/2026 (MT Newswires) -- The Bank of Canada meets on Wednesday and will announce its monetary policy decision at 9:45 a.m. ET, said MUFG.

Wednesday's decision takes place against a backdrop that has changed notably and as such the bank expects a cautious message by the BoC as well that will likely emphasise the high level of uncertainty and the need for additional time in order to assess the extent of the potential inflation impact from higher energy prices.

The Canadian dollar (CAD or loonie) is currently the top-performing G10 currency after the US dollar (USD) since the conflict began and has weakened just 0.3% against the US dollar, helped by the positive terms of trade shock of being a crude oil producer, stated MUFG. The Australian dollar (AUD) is the next best-performing G10 currency, down just 0.7% versus the US dollar.

Whether that CAD performance can persist is questionable, wrote the bank in a note to clients. The BoC meeting on Wednesday follows a terrible employment report with jobs declining by 84,000 in February, driven by a 108,000 drop in full-time employment. It was the largest drop since the plunge in jobs in April 2020 following the start of COVID-19.

In addition to that, Canada's latest consumer price index data was weaker than expected, with headline year-over-year CPI falling 0.5ppt to 1.8%, the lowest since July last year. This most recent flow of economic data points to the BoC having time to assess any upside inflation risks stemming from the conflict, added MUFG.

Ahead of the conflict, the market was pricing a mere 3bps risk of a cut at the March meeting, but by year-end had an 11bps of easing priced, pointed out the bank. March is now close to zero basis points priced and by year-end, one 25bp rate hike is priced.

Given the plunge in jobs and weaker CPI since then, markets would certainly have been potentially close to a 25bps cut priced by year-end were it not for the conflict. Tariff uncertainties have hit trade with the United States and weak jobs data in the U.S. also point to downside risks to Canada's growth due to U.S. growth risks. MUFG continues to assume the Trump administration will engineer an off-ramp to de-escalate within the next two weeks and as such, the bank assumes the BoC could still be in a position to cut by year-end.

However, the message on Wednesday will be clear -- the BoC needs time to assess the possible extent of the energy price shock before making any conclusions on the direction of the policy path.

In that scenario, USD/CAD should remain in a relatively tight trading range and initially, if the conflict was to last longer and crude oil prices were to jump further beyond the USD 100 level, then CAD support from the terms of trade dynamic could start to fade if North America growth risks increase and equity markets take a hit, noted MUFG.

Risk-off would start to play a greater role, which would see USD/CAD move to the upside. For now, that isn't the bank's base case, and while it remains in the relatively early stages of this conflict, MUFG estimates the BoC to steer clear of any clear guidance on the policy outlook.

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