Loonie Rallies on BoC Inflation Warnings, Rate Hike Odds Rise

The Canadian dollar rebounded from its lowest level in nearly three weeks after the Bank of Canada (BoC) maintained its policy rate at 2.25% but cautioned about rising inflation risks.

Markets focused on the tone, rather than the decision to hold rates steady, as the BoC highlighted the Middle East conflict and new US tariffs as fresh sources of upside inflation risk.

CIBC Capital Markets noted that implied odds of a rate hike rose to around 75% from about 64% before the decision, driving up Canada's 2-year government yield to 3.058%

This increase in yields can impact borrowing rates for households, as lenders often use short-term yields as a benchmark for pricing shorter fixed-rate loans.