Budget may push Bank of Canada toward further rate cuts

The federal government’s latest budget may prove too restrained to lift Canada’s slowing economy, potentially leaving the Bank of Canada with little choice but to reduce interest rates again, economists said Wednesday.

The Bank of Canada lowered its policy rate to 2.25 per cent at the end of October and signalled it believed that level was consistent with supporting growth while containing inflation. But the new fiscal blueprint, unveiled Tuesday by Finance Minister François-Philippe Champagne, leans heavily on long-term spending and offers limited short-term stimulus — a mix that some analysts say could prompt additional easing.

“With the majority of spending focused on long-term defence and infrastructure projects, today’s announcement increases the likelihood that the Bank of Canada will still have to cut its policy rate below neutral to support growth,” Bradley Saunders, North America economist at Capital Economics Ltd., wrote in a note to clients.

According to Saunders, the new 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. That, he said, “will amount to 2.5 per cent of gross domestic product, implying the new measures hardly constitute the ‘generational’ change Finance Minister François-Philippe Champagne had promised.”

A measured response to weaker growth

The Bank of Canada said last month that the economy was undergoing a structural adjustment triggered by U.S. tariffs introduced under President Donald Trump, as global trade patterns and supply chains continue to realign.

“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 central bank said in its Oct. 29 statement.

That message was widely interpreted as an invitation for Ottawa to do more through fiscal policy. But analysts reviewing the budget’s details found little in the way of immediate support. Saunders calculated that the measures contain only about $9 billion in net new spending this fiscal year and next, after stripping out previously announced commitments.

The 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.

Limited near-term boost

Economists at Bank of Montreal, Robert Kavcic and Shelly Kaushik, reached similar conclusions. “We estimate net new announcements of $4 billion for this fiscal year and a bit more for the next,” they said in an analysis of the budget.

“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,” they said.

“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,” the BMO economists added.

Implications for mortgage markets

For lenders, brokers and homebuyers, the conversation now turns to whether interest rates have further to fall — and how fast.

Capital Economics, which has generally taken a more dovish stance than market consensus, has projected that the central bank may deliver two additional 25-basis-point reductions next year. That would push the policy rate below the lower end of the Bank of Canada’s estimated neutral range of 2.25 per cent to 3.25 per cent — the level at which rates are considered neither stimulative nor restrictive.

While economists agree that the fiscal plan provides some stability and predictability for long-term projects, they also note that the near-term impact on demand may be too small to offset trade headwinds and subdued private investment.

For mortgage professionals, 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.

Source CMP
By Matthew Sellers