06:35 AM EST, 01/30/2025 (MT Newswires) -- United States President Donald Trump has threatened to hike tariffs on Canada, China and Mexico from Saturday, noted MUFG.

The imminent risk of tariff hikes was weighing more heavily on the Bank of Canada's minds when making Wednesday's policy decision, said MUFG. BoC Governor Tiff Macklem stated that it was an important factor in the BoC's decision to deliver another 25bps rate cut Wednesday despite evidence that past rate cuts have started to boost the economy with the recent strengthening of consumption and housing activity expected to continue in the absence of new tariffs from the U.S.

The BoC does though expect gross domestic product and potential growth to be more moderate than expected in October due to the government's reduced immigration targets.

The BoC did emphasize that the baseline economic outlook was subject to more-than-usual uncertainty particularly because of the threat of trade tariffs from the U.S.

In the Monetary Policy Report, the BoC revealed that it expects a long-lasting and brad-based trade conflict would badly hurt economic activity in Canada. At the same time, the higher cost of imported goods will put direct upward pressure on inflation.

Governor Macklem stated that when considering its potential monetary policy response to a tariff shock, the BoC would need to carefully assess the downward pressure on inflation from weakness in the economy, and weigh that against the upward pressure on inflation from higher input prices and supply chain disruptions.

MUFG estimates the tariffs to tip the balance more in favor of the BoC cutting rates further to support growth. The BoC also expects the Canadian dollar (CAD or loonie) to weaken in response to the deterioration in Canada's trade balance and likely hit to Canada's terms of trade.

The bank predicts the Canadian dollar to be weaker by a further 5%-10% if Trump goes ahead and puts in place 25% tariff hikes on imports from Canada. Some of the initial negative impact on the Canadian dollar would be dampened if as seems likely Canada puts in place retaliatory tariffs against the US.