The Bank of Canada delivered another interest rate cut on Wednesday, reducing its policy rate by a quarter percentage point to three per cent. But looming U.S. tariffs are weighing on the central bankB次元官网网址檚 economic outlook.

The cut, the central bankB次元官网网址檚 sixth consecutive one since June, comes as the central bank said inflation is sitting around its two per cent target and the economy is picking up speed.

B次元官网网址淭here are signs economic activity is gaining momentum as past interest rate cuts work their way through the economy,B次元官网网址� Bank of Canada governor Tiff Macklem said in prepared remarks.

But CanadaB次元官网网址檚 economic outlook is clouded in uncertainty with U.S. tariffs looming.

Donald Trump has threatened Canada with 25 per cent tariffs on all goods, but when the U.S. President might make good on his threat B次元官网网址� and to what extent B次元官网网址� remains to be seen.

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

It expects the countryB次元官网网址檚 GDP to grow by 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 B次元官网网址� and population decline in 2026 amid new federal immigration targets B次元官网网址� and a downward revision to business investment from increasing policy uncertainty.

But the forecast assumes Trump wonB次元官网网址檛 make good on his tariff threat. If he does, the outlook is far bleaker.

B次元官网网址淲e donB次元官网网址檛 know the scope of retaliatory measures or what fiscal supports will be provided,B次元官网网址� Macklem said.

B次元官网网址淎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.B次元官网网址�

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 of tariffs, the Bank of Canada projected, would lower CanadaB次元官网网址檚 GDP by 2.4 per cent in the first year whenever tariffs come in.

Such a scenario B次元官网网址� what the central bank is calling its B次元官网网址渂enchmark calibrationB次元官网网址� B次元官网网址� 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 B次元官网网址� by comparison of the Bank of CanadaB次元官网网址檚 projection of a 1.8 GDP growth in 2025.

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 CanadaB次元官网网址檚 inflation rate in the first year could be 0.8 per cent in the first year, and 1.3 per cent in the next year.

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 B次元官网网址� in contrast to the back-to-back jumbo cuts that closed out 2024.

This report by The Canadian Press was first published Jan. 29, 2025.

Nick Murray, The Canadian Press