The Bank of Canada (BoC) is set to announce its latest interest rate decision on July 12 at 14:00 GMT. The BoC has a history of surprising markets with its decisions, unlike other central banks such as the US Federal Reserve or the European Central Bank. In fact, the BoC surprised markets in three of its last eight decisions.


The last decision in June saw the BoC hike interest rates from 4.50% to 4.75%, despite leaving rates unchanged twice in a row and hinting that it was done increasing borrowing costs. The BoC Governor, Tiff Macklem, and his colleagues signaled that the June hike was a one-off, a response to stronger data. However, markets were left with disbelief, and officials' comments about fighting inflation and the latest upbeat jobs report have raised expectations for another increase to 5% in the upcoming meeting.

If the BoC does decide to hike interest rates, it could have three potential consequences on the Canadian economy and the USD/CAD pair.

Firstly, uncertainty breeds uncertainty, and fears of further increases could lead to skepticism and keep markets awaiting further moves. Any "dovish hike" would be met with skepticism and support the Canadian dollar.

Secondly, inflation is falling in Canada. The Consumer Price Index (CPI) fell to 3.4% in May, while Core CPI missed estimates and slid from 4.1% to 3.7%. By extending its tightening cycle and pushing borrowing costs to highly restrictive territory, investors could worry that the BoC would not stop until inflation fully returns to the bank's 2% target. Such hawkishness could give the Canadian dollar an advantage.

Thirdly, inflation is falling in the US. Statistics agencies in Washington are set to release a fresh inflation report for June just 90 minutes before the BoC announces its decision. It is expected to show a drop in headline inflation to 3.1% YoY and Core CPI to 5%. Investors expect one more hike in the US, and a stubborn BoC could contrast with that and send USD/CAD tumbling down.

In the event that the BoC decides not to hike rates, it would respond to weaker inflation, concerns about a US slowdown, and it would follow its own hints. As markets expect a hike, skipping one would send the Canadian dollar tumbling.

In conclusion, an as-expected rate hike from the Bank of Canada is far from being a non-event. The BoC's decision to hike or not hike interest rates could have significant consequences on the Canadian economy and the USD/CAD pair. The BoC's tendency to surprise markets means that there is room for a downside move in USD/CAD in response to a hike, regardless of what the institution signals about the future.