06:51 AM EST, 01/29/2025 (MT Newswires) -- The Bank of Canada is widely anticipated to deliver a penultimate 25bps rate cut to 3.0% at 9:45 a.m. ET on Wednesday, but it's the updated inflation and growth forecasts and scenarios around possible United States tariffs that will draw the most attention for the Canadian dollar (CAD or loonie) and government bonds (CANGBs), said Societe Generale.

A disinflationary shock from a trade war with the U.S. -- estimates vary up to 6ppt of gross domestic product -- would put pressure on the BoC to cut rates below neutral -- 2.25% lower end of the neutral range, wrote the bank in a note to clients.

The resulting widening of rate spreads versus the United States would pile pressure on the currency, stated SocGen. Growth is tracking above 2.5% for Q4 2024 against the BoC's projection of 2%, and companies are reporting an improving sales outlook.

Headline inflation is inside the target, and core inflation ticked down to 2.5% year over year in December. The money markets are pricing 1.5 cuts by year-end, added the bank.

The Canadian government in a scenario analysis in 2018 concluded that retaliation (oil, steel, aluminum) would have "distinct economic implications relative to final goods, notably on US exports, the GDP deflator, and real GDP." The BoC in a 2019 Monetary Policy Report estimated the potential toll of a trade war on GDP at 6% in the worst case and a 25% drop in the currency.