The Bank of Canada cut its policy rate to 3.0% in January as expected, noted Scotiabank.

Despite strong signals from the job market and households to start the year and some concern that underlying measures of inflation point to risks of above-target inflation, the balance of risks has tilted slightly more negative than in December due to increased uncertainty, said the bank.

This led Scotiabank to add one more cut to its BoC rate call, with enormous confidence bands on both sides. Scotiabank now expects Canada's central bank to cut rates once more in March, bringing the policy rate to 2.75%, the midpoint of their neutral range.

One notable new piece of information is the observed response by the Canadian government to United States tariffs before the pause, added the bank. Canada opted to retaliate to broad-based tariffs with tariffs on just under a third of U.S. imports.

This is below the threshold that Scotiabank estimates would force the BoC to raise its policy rate, allowing Canada's central bank to prioritize the growth hit over the inflation result.

As of today, the bank has no additional information to justify a larger shift in its rate call. If, for example, the announced tariffs and retaliation materialize after the 30-day pause, Scotiabank would be in a completely different forecasting universe.

Left in place for a prolonged period of time, such tariffs and retaliation, whereby Canada retaliates on just under a third of U.S. imports, would spell a recession for Canada, with the policy rate quickly approaching its effective lower bound, according to the bank.