The potential for U.S. tariffs is clouding the economic outlook for the Bank of Canada as it delivered another interest rate cut, reducing its policy rate by a quarter-percentage point to three per cent.

The cut, the central bank91裸聊视频檚 sixth consecutive one since June, comes as the bank said inflation is sitting around its two per cent target and the economy is picking up speed.

91裸聊视频淭here are signs economic activity is gaining momentum as past interest rate cuts work their way through the economy,91裸聊视频� Bank of Canada governor Tiff Macklem said in prepared remarks on Wednesday.

But Canada91裸聊视频檚 economic outlook is mired in uncertainty with U.S. tariffs looming.

U.S. President Donald Trump has threatened Canada with 25 per cent tariffs across the board, but when he might make good on his promise 91裸聊视频� and to what extent 91裸聊视频� remains to be seen. They91裸聊视频檙e still slated to come as early as Saturday, Trump91裸聊视频檚 press secretary confirmed on Tuesday.

However, on Wednesday, Howard Lutnick 91裸聊视频� Trump91裸聊视频檚 pick for commerce secretary 91裸聊视频� said at a Senate confirmation hearing that tariffs could come in two stages.

One on Saturday as planned to address Trump91裸聊视频檚 concerns along the border, and another in the spring in a bid to move manufacturing back to the U.S.

As such, the central bank wants Canada91裸聊视频檚 economy to be in the best position possible to handle a tariff war, since its own tools are limited beyond interest rate changes.

91裸聊视频淭ariffs mean economies simply work less efficiently 91裸聊视频� we produce and earn less than without tariffs. Monetary policy cannot offset this,91裸聊视频� Macklem said.

91裸聊视频淲hat we can do is help the economy adjust. However, with a single instrument 91裸聊视频� our policy interest rate 91裸聊视频� we can91裸聊视频檛 lean against weaker output and higher inflation at the same time.91裸聊视频�

Asked to elaborate on what the Bank of Canada91裸聊视频檚 role would be in a trade war, Macklem said the bank will be weighing a couple factors.

91裸聊视频淚f the weakness in the economy that comes through as a result of tariffs, and the downward pressure that91裸聊视频檚 putting on inflation, comes faster than the upward pressure, then monetary policy, I expect, will be supporting growth,91裸聊视频� Macklem told reporters at a press conference.

91裸聊视频淥n the other hand, if the inflationary pressures come through faster and are bigger, monetary policy will have to be more focused on guarding against persistent inflation.91裸聊视频�

In its monetary policy report also released Wednesday, the Bank of Canada revised lower its GDP forecast.

It expects the country91裸聊视频檚 GDP to grow 1.8 per cent in 2025 and 2026, down from its previous projections of 2.1 and 2.3 per cent, respectively.

The revised projection factors in lower population growth 91裸聊视频� and population decline in 2026 amid new federal immigration targets 91裸聊视频� as well as a downward revision to business investment from increasing policy uncertainty.

But the forecast assumes Trump won91裸聊视频檛 make good on his tariff threat. If he does, the outlook is far bleaker.

91裸聊视频淲e don91裸聊视频檛 know the scope of retaliatory measures or what fiscal supports will be provided,91裸聊视频� Macklem said.

91裸聊视频淎nd even when we know more about what is going to happen, it will still be difficult to be precise about the economic impacts because we have little experience with tariffs of the magnitude being proposed.91裸聊视频�

Stephen Brown, deputy chief North America economist at Capital Economics, said any tariffs would hit the economy hard.

91裸聊视频淏ut the bank hinted today that it might have to refrain from providing monetary policy support, because otherwise there could be a risk that inflation takes off again,91裸聊视频� Brown said.

91裸聊视频淭hat is in turn a risk to our view that the bank will cut twice more this year.91裸聊视频�

The central bank presented four scenarios if the U.S. hits Canada with 25 per cent tariffs, and Canada responding in kind dollar-for-dollar.

The impact, the Bank of Canada projected, would lower Canada91裸聊视频檚 GDP by 2.4 per cent in the first year whenever tariffs come in.

Such a scenario 91裸聊视频� what the central bank is calling its 91裸聊视频渂enchmark calibration91裸聊视频� 91裸聊视频� assumed Canadian exports react to price changes in line with historical norms and the cost of tariffs were fully passed on to consumer prices over three years.

So, if Trump imposed tariffs this year, the shock could be large enough to send Canada into a recession 91裸聊视频� by comparison of the Bank of Canada91裸聊视频檚 projection of a 1.8 GDP growth in 2025.

91裸聊视频淭he scenario we chose is a severe scenario. This is permanent. It91裸聊视频檚 not sort of a first shot to subsequent negotiation,91裸聊视频� Macklem said.

In another scenario, using the same parameters as the benchmark except the cost of tariffs are passed on in half the amount of time, the impact to Canada91裸聊视频檚 inflation rate in the first year could be 0.8 per cent, and 1.3 per cent in the next year.

91裸聊视频淲e don91裸聊视频檛 have a lot of good, historical examples where we91裸聊视频檝e had tariff shocks of this magnitude, so we can91裸聊视频檛 just go and estimate what would happen over history,91裸聊视频� Macklem added.

Scotiabank91裸聊视频檚 head of capital markets Derek Holt said if no tariffs come to fruition, he expects the Bank of Canada is done cutting rates now that it91裸聊视频檚 reached three per cent.

91裸聊视频淎bsent tariffs, it91裸聊视频檚 a constructive outlook and they91裸聊视频檙e not indicating appetite toward doing more,91裸聊视频� Holt wrote in a note to clients.

91裸聊视频淚 don91裸聊视频檛 buy their dismissal of momentum in core inflation measures in month-over-month (seasonally-adjusted annual rate) terms and so I think that91裸聊视频檚 an added reason they91裸聊视频檇 probably never admit.91裸聊视频�

However, CIBC Capital Markets chief economist Avery Shenfeld said interest rates are 91裸聊视频渟till too high91裸聊视频� considering the weakness in the jobs market and easing inflation.

91裸聊视频淭he combination of a labour market that the bank describes as 91裸聊视频渟oft91裸聊视频� and underlying inflation judged to be near two per cent tilts the policy balance towards a further (three-quarters of a percentage point) in cuts in our forecast, particularly as the tariff threat weighs on confidence,91裸聊视频� he said in a note to clients.

91裸聊视频淥n tariffs, the bank is in the throes of a major research effort, but seems to believe, as we do, that a trade war would have only a temporary lift to inflation, but could entail a material hit to growth that wasn91裸聊视频檛 factored into their forecasts.91裸聊视频�

In December, the Bank of Canada signalled that more rate cuts would be coming through 2025, but it would take a more gradual approach to them 91裸聊视频� in contrast to the back-to-back jumbo cuts that closed out 2024.

91裸聊视频淪trikingly, in its policy statement, the bank dropped the line from December that 91裸聊视频榃e will be evaluating the need for further reductions in the policy rate one decision at a time91裸聊视频� and it was not replaced with anything resembling forward guidance,91裸聊视频� said Brown.

91裸聊视频淭hat decision may reflect the fact that the policy rate is now within the bank91裸聊视频檚 2.25 per cent to 3.25 per cent neutral range estimate, or it may reflect uncertainty about how the bank might need to respond if tariffs are imposed.91裸聊视频�