While economists expect the Bank of Canada to continue its loosening cycle and cut interest rates on Wednesday, U.S. President Donald Trump’s threat of 25 per cent tariffs has left longer forecasts up in the air, and could see the Bank change its path and potentially even reverse course.

Trump’s most recent threat has been to impose a 25 per cent tariff on Canadian imports to the U.S. starting Feb. 1, just three days after the Bank of Canada makes its next interest rate decision. The Bank is widely expected to cut its benchmark interest rate for the sixth consecutive decision on Wednesday by 25 basis points, which will bring it to three per cent. Since June 2024, the central bank has slashed interest rates by 175 basis points.

But where the Bank of Canada goes from there is less certain.

“Tariffs represent a complicated setup for central banks. They tend to increase costs (inflationary), but they also weaken an economy (deflationary),” RBC chief economist Frances Donald and economist Nathan Janzen wrote in a recent research note. The economists note that most central banks have said they are less likely to respond to inflation caused by tariffs, because it is a one-off increase. But they also note rising inflation could stifle demand, which “could be more damaging.”

“How the Bank of Canada will respond to this environment is not clear, but it has implications for other sectors like housing that could provide an offset from further interest rate cuts,” Donald and Janzen wrote.

CIBC economist Andrew Grantham wrote in a report Friday that “even before adding President Trump’s trade threats into the mix, a case could be made for further policy easing.”

“The potential for Canadian exports to be hit with tariffs, maybe as early as February 1st, should only strengthen the case,” Grantham wrote.

“While tariffs, and likely retaliatory actions, would boost the price level in the near term, our analysis suggests that the impact on activity (adding to the slack already present within the economy) would be great enough to be disinflationary over the medium term without additional policy support.”

Some economists, however, believe interest rate increases could be on the table in the event of a trade war between the U.S. and Canada.

Scotiabank economist Derek Holt says that, without retaliatory tariffs from Canada, the Bank of Canada would likely respond to U.S. tariffs with further easing.

“The economy would be tossed into recession, unemployment would rise, pricing power would be crushed, taking inflation down with it. That’s a recipe for combined monetary, fiscal and regulatory easing,” Holt wrote in a research note.