The Canadian dollar weakened to nearly 1.40 per USD in mid-September, its lowest level in more than a month, after the US Federal Reserve raised interest rates as expected. The Fed lifted the target range for the federal funds rate by 25 bps to 3.75%-4.0%, reinforcing the US dollar’s advantage over the loonie. Updated Fed projections indicated that most policymakers anticipate another rate hike before the end of 2026, further widening the interest-rate differential between the US and Canada.
In contrast, the Bank of Canada left its key policy rate unchanged at 2.25% at its September meeting, in line with market expectations. However, it warned that inflation risks had increased and that new tariffs had made the growth outlook more uncertain. The BoC kept its policy guidance flexible, stating it would adjust the stance of monetary policy as needed. Governor Macklem emphasized that policymakers were prepared to raise rates if inflation remained elevated.
