With the imposition of US tariffs, the Bank of Canada could cut interest rates at each of its next four announcements, according to Douglas Porter, chief economist and managing director at Bank of Montreal (BMO).
On Tuesday, the US levied tariffs of 25% on Canadian goods and 10% on Canadian energy and minerals exported to the US.
The Bank of Canada’s overnight rate sits at 3% and Porter’s forecast of four consecutive cuts of .25% this year (March 12, April 16, June 4 and July 30) would take it to 2%.
Porter said in a note the tariffs levied could be expanded.
“The original executive order said: “Should Canada retaliate… the President may increase or expand in scope the duties imposed under this order,” wrote Porter.
“Canada has announced 25% retaliatory tariffs on C$155 billion worth of imports from the US; $30 billion effective March 4 and the remaining $125 billion after 21 days. Several provinces have also announced or are planning non-tariff measures.”
Porter warns there are unknowns about moves US President Donald Trump could make.
“It’s uncertain whether: 1) the U.S. will retaliate for Canada’s retaliation; 2) the Administration will heed the calls from U.S. businesses for exemptions; and 3) if the executive order will survive legal challenges,” Porter wrote.
“However, by April 1, there will be three reports delivered to the President (under the America First Trade Policy memorandum) that should be full of tariff recommendations backed by investigations (or soon-to-be), setting the stage for more Section 201 (safeguard), Section 232 (national security) and Section 301 (unfair trade practices) tariffs.”
“In consequence, tariffs on Canada and other countries could be around for a while, and could go potentially higher. In fact, ‘reciprocal’ tariffs or industry-specific tariffs may be ‘stackable’ on top of the initial 25% levy.”
What is known, the tariffs will adversely affect the Canadian economy, said Porter.
“Trump’s tariff hammer will come down hard on Canada’s economy,” he wrote. “If the announced tariffs remain in place for one year, the economy would face the risk of a moderate recession. A couple of quarters of contraction are well within the realm of possibility.”
BMO expects Canadian GDP growth to fall by about 1.5% in 2025 due to reduced demand for Canadian products in the US, as well as problems with supply chains due to chaos.
“A weakening economy and probable jump in unemployment to about 8% will weigh against inflation pressures”, wrote Porter, adding, the economy could recover “modestly” in 2026 with the tariffs’ likely revocation.
Porter believes the Bank of Canada will be cautious in its approach to the rate outlook, keeping an eye on the inflation risk posed by countermeasures and a plunging loonie.
Depending on circumstances and outcomes, the bank could even decide to trim its key rate lower than 2%, said Porter, if the bank is comfortable with the prevailing inflation backdrop later this year.”