08:00 AM EST, 01/24/2025 (MT Newswires) -- Rosenberg Research said it was getting asked what the Bank of Canada's reaction function will be from the United States President Donald Trump's trade tariffs, assuming they come to fruition.

There is little doubt that the BoC will have to slash rates further because, as a stand-alone event, this is a deflationary shock to the Canadian economy that will trigger a deep recession with a 2.0% real gross domestic product contraction, with over 400,000 jobs lost and the unemployment rate headed to 8.0% from 6.7%, noted Rosenberg. That is what its model concludes.

There is little net impact on Canadian underlying inflation from the U.S. tariff imposition -- although some modest effects from a disrupted supply chain. The "inflation" is more of a U.S. story insofar as U.S. consumers are left holding the bag, stated Rosenberg.

Canadians should consider the U.S. tariff as a deflationary economic shock of historic proportions. The BoC response -- assuming no tit-for-tat trade war because retaliation will only make things worse -- will be to cut rates 100bps more than would ordinarily be the case, meaning a move lower in the policy rate to around 1.5% or possibly lower even with the Federal Reserve on a pause, it added.

There will be a currency reaction to all this, in all probability, a further -10% depreciation to C$1.60 (63 cents U.S.) -- and that is the most effective way to combat a tariff from the imposing trading partner, no matter who it is, pointed out Rosenberg.

While the depreciation will have inflationary consequences in a static sense, it would pale next to the economic shock that drives the local economy deeper into an excess supply backdrop. The comparison between what the loonie does to the economy compared with an 8% jobless rate is even "silly" to talk about -- the latter outweighs the former from an "inflation" standpoint, in a dynamic equilibrium analysis, by a six-to-one ratio.

What that means is that the entire impact of the tariffs would be to pull down Canada's core inflation rate by nearly a full percentage point -- meaning from the current 2.2% to closer to +1.3%.

So, plan for a 63 cent (U.S.) Canadian dollar, a 1.5% policy rate, and a 2.5% yield on the 10-year Government of Canada bond as the fallout from any 25% Trump-induced tariff on the country's so-called "friend" north of the border, according to Rosenberg.