06:34 AM EST, 02/07/2025 (MT Newswires) -- After a weekend on the brink of a full-blown trade war, Bank of Canada Governor Tiff Macklem sounded slightly more hawkish than expected in a speech late Thursday, noted Desjardins.

Governor Macklem acknowledged that the threat of United States tariffs is already affecting business and household uncertainty, which will weigh on economic activity.

However, the governor went on to strike a cautious tone regarding how much easing the BoC is willing to deliver if significant broad-based tariffs are applied, said the bank.

While no one should expect monetary policymakers to cut rates as much as they would in a typical recession because of the countervailing pressures on inflation, his mention of public disappointment and frustration might raise some eyebrows, pointed out Desjardins.

It's obvious that Macklem wanted to be clear about the limitations of monetary policy in the event of a tariff shock, stated the bank. The governor highlighted that officials "need to avoid the temptation to overload monetary policy by expecting more of it than it can deliver."

That's seemingly a lesson learned from the BoC's strategy during the COVID-19 pandemic, in which forward guidance and quantitative easing were used too generously, it added.

That said, if a trade war breaks out and 25% tariffs are applied to most Canadian exports, the bank's view that the BoC would cut the policy rate down to 1.50% remains intact. In past recessions, the BoC has needed to trim the policy rate by 400bps-500bps, much more than what Desjardins is expecting.

As a result, the bank believes its forecast strikes the appropriate balance. The somewhat hawkish tone does, however, have Dedinssjar on the fence about a 25bps cut in March if no tariffs have been levied yet.

While the governor briefly mentioned the negative economic impacts of tariff threats, he did nothing to confirm market pricing for another 25bps rate cut, added Desjardins. That's a bit surprising given the events over the weekend and the fact that the 3.00% policy rate is still above the 2.75% midpoint of the BoC's estimated neutral rate range.