The deficit-laden budget brought down by the Mark Carney Liberal government on Tuesday could force the Bank of Canada’s hand to further cut its overnight rate on Dec. 10.
The bank lowered the rate to 2.25% from 2.5% on Oct. 29, saying at the time it was satisfied the new rate was sufficient to support the Canadian economy and contain inflation, but the new budget could be too restrained to boost the slowing Canadian economy, say economists.
At its rate announcement in October, the bank said Canada’s economy was in the midst of a structural shift due to US tariffs and the subsequent unravelling of trade patterns and supply chains.
“The structural damage caused by the trade conflict reduces the capacity of the economy and adds costs. This limits the role that monetary policy can play to boost demand while maintaining low inflation,” the bank said in a statement.
At the time, market watchers felt the bank was looking to Ottawa to stimulate the economy, in addition to its rate cut.
The feds' budget, however, puts the emphasis on long-term spending, offering little short-term stimulus, which could lead to a rate cut in December, said Bradley Saunders in a note to clients on Wednesday.
Saunders, North America economist at Capital Economics Ltd., wrote the fed’s spending plan “included $36 billion in tax relief, $63 billion for defence, $13 billion for infrastructure and $28 billion in other programs, offset by $51 billion in savings and cuts.”
He calculated the measures contain only about $9 billion in net new spending this fiscal year and next, after stripping out previously announced commitments.
“The new budget commitments will push the federal deficit to nearly twice its current size by the end of the decade, rising to $56.6 billion in 2029–30 compared with $36.3 billion in 2024–25,” wrote Saunders, adding, “that will amount to 2.5% of gross domestic product, implying the new measures hardly constitute the ‘generational’ change Finance Minister François-Philippe Champagne had promised.”
“With the majority of spending focused on long-term defence and infrastructure projects, (the budget) increases the likelihood that the Bank of Canada will still have to cut its policy rate below neutral to support growth.”
Economists Robert Kavcic and Shelly Kaushik at Bank of Montreal, in an analysis of the budget, feel the new net funding will be lower. “We estimate net new announcements of $4 billion for this fiscal year and a bit more for the next.”
“The important takeaway here is that there is indeed a large wave of stimulus hitting the economy, but we already knew about the vast majority of it and therefore won’t be scrambling to sharply revise up our growth forecast in the wake of this budget.”
“Additionally, Ottawa is banking on an acceleration in private-sector investment with the aid of fast-tracked approvals across a range of projects/industries, that’s certainly encouraging, but success there will depend highly on execution,” added Kavcic and Kaushik.
For homeowners and buyers, as well as mortgage lenders and brokers, a rate increase in December is not likely, according to the economists, with the question being ‘is a cut in order’?
Capital Economics has already forecast the bank could cut its rate by .25% twice in 2026, pushing the rate below the lower end of its estimated neutral range of 2.25% to 3.25%, the level where rates are considered neither stimulative nor restrictive.
That could mean a more extended period of lower rates, a development that may bring modest relief to borrowers, but also signal a slower recovery in housing demand.
