09:27 AM EST, 12/12/2024 (MT Newswires) -- Looming over the Bank of Canada's Wednesday rate cut announcement was the threat of a 25% United States tariff on Canadian exports starting next Jan. 20, said Bank of Montreal (BMO).

Governor Tiff Macklem did his best at Wednesday's press conference to highlight the uncertainty around that possibility while reinforcing its negative impacts on the US and Canada, noted the bank.

In doing so, the governor referenced a past BoC paper from 2019 that estimated the effects of a 25% tariff on all US imports, regardless of origin. It assumed like-for-like retaliation from the rest of the world.

The study suggests that prices would spike by 4.5% in Canada and 3.7% in the US in the short term, but the long-term effect would be lower prices in Canada because of weaker demand and contracting gross domestic product, pointed out BMO.

Indeed, Canada's real GDP could fall 3.1% over the long run, while the US contraction would be a milder 1.1%.

There are a few caveats to translating this to the 2025 scenario -- notably, the 25% tariff is limited to Canada and Mexico, added the bank. That would deepen the impact on those countries while moderating the consequences for the US economy.

The paper doesn't mention the hit to the exchange rate -- a weaker Canadian dollar (CAD or loonie) would absorb some of the shock. The study also assumes a full pass-through to consumers, which would be harder to do if producers want to compete with the rest of the non-tariffed world, according to BMO.

It's clear that tariffs of this magnitude would be "highly disruptive" to the Canadian economy if they end up coming into force, stated the bank.