08:19 AM EDT, 03/12/2025 (MT Newswires) -- United States President Donald Trump dialled back on his threat to double tariffs on Canadian steel and aluminium on Tuesday to 50% after Ontario backed off on its plans to impose a surcharge on the electricity supply to the U.S., noted Societe Generale.

This latest development is a small respite against the hostile background between neighbors, wrote the bank in a note to clients. The trade war is a reason for the Bank of Canada to lower rates by another 25bp on Wednesday to 2.75%.

This is fully priced, while half a point is unlikely, stated SocGen. In a speech last month on tariffs, structural change and monetary policy -- citing the macro forecasts of the January Monetary Policy Report- Governor Tiff Macklem warned of a structural shock to the economy different from the pandemic.

Based on 25% tariffs on non-energy goods exports and 10% on energy exports, the BoC estimates a hit to gross domestic product of about 2.5 percentage points through exports (-8.5pp) in one year and personal consumption over two years (at least -2pp).

Financial markets see the danger of inflation expectations unmooring as remote, pointed out the bank. The BoC could argue that because of the trade war and permanent shock to the growth profile, returning the policy rate to the lower end of the neutral range (2.25%-3.25%) is warranted.

Additional cuts could be staggered over the next two to three meetings, according to SocGen. The curve is pricing 75bps by the end of the year.

The Canadian dollar (CAD or loonie) may look attractive at 1.45, and short positions are stretched, but the structural change in the commercial relationship with the U.S. means the loonie will take time to settle, added the bank.