Bank of Canada is widely expected to keep interest rates unchanged today, Wednesday, as a series of aggressive hikes have not yet fully impacted the economy, says an expert.

The current interest rate at the bank is 4.50 percent, as it continues to pursue its 2 percent inflation target, while monitoring the country's financial system following the banking crisis.

Regardless of the approach chosen by the central bank moving forward, Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins, said he expects a difficult path ahead - something the bank needs to prepare for.

He said, "We have not yet seen the full impact of monetary tightening in the past, and I expect the next phase to witness more market volatility."

Mendes added that this is something policymakers need to explain.

He said one way the bank can do this, aside from keeping rates on hold for now, is to ensure the public has the necessary tools to support the financial system.

He said, "They have financial system tools and liquidity injection tools that they can use to focus on the banking system."

He added that this would help support markets and banks ahead of any potential future disruption.

On the other hand, economists at the TD Securities banking group discuss the Bank of Canada's interest rate decision and its potential impact on the USD/CAD currency pair trades. In this regard, experts believe the Bank of Canada will decide to keep the interest rate level unchanged at this meeting.

However, USD/CAD trades will be affected by what the interest rate statement contains in particular, and the potential perceptions of what the statement may include and the expected impacts on the upcoming USD/CAD pair movements can be reviewed as follows:

Scenario One

According to this perception, TDS experts believe that the Bank of Canada may approve holding the interest rate level unchanged at this meeting, with the interest rate statement indicating strong Canadian GDP data for the first quarter as well as an exceptionally tight labor market; representing increased risks of inflation while downplaying the significance of global banking stresses as an external factor.

Also, if the interest rate statement reported an upward revision of the Bank of Canada's GDP growth estimates for 2023 in April while the forward guidance did not change from March, bank experts favored the USD/CAD pair to decline by 0.50%.

Scenario Two

Economists clarified that the Bank of Canada will decide to keep the interest rate at 4.50% alongside the interest rate statement indicating global banking stresses as a headwind to foreign demand, which could negatively impact the Canadian economy, while at the same time, the statement indicates that economic growth in the first quarter was stronger than expected.

Also, the Bank of Canada revises its GDP growth forecast for 2024 lower than that of 2023, and in this scenario, the bank’s economists believe the USD/CAD currency pair will trade down by 0.15%.

Scenario Three

According to the bank’s economists; if the interest rate statement shows weakness in the strength of first-quarter GDP as well as the tight labor market, against easing pressures on productive capacity and a decline in the severity of global impacts on the Canadian economy.

In addition to reviewing economic growth and inflation data lower, along with indicating the possibility that the Bank of Canada may adopt further future interest rate hikes, the USD/CAD pair will rise by 0.50% in this case.