Canada’s budget 2025 may not provide the immediate fiscal stimulus many were expecting, which could force the Bank of Canada to cut interest rates further, an economist said. The Bank of Canada cut interest rates to 2.25 per cent at the end of October and said that it believed rates were at the appropriate level to support the economy and

guard against inflation . Central bank policymakers indicated that Canada’s economy was undergoing a structural shift due to United States President

Donald Trump’s tariffs and the accompanying unwinding 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 of Canada said in its statement on Oct. 29.

That appeared to pass the baton to Ottawa to boost economic growth with stimulus in the

federal budget released Tuesday. However, one economist doesn’t think the measures laid out in the budget will provide enough juice to achieve that goal in the shorter term.

“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., said in a note.

Saunders said spending announced in the budget increases the deficit to nearly double its current size out to 2030. It will close the decade at $56.6 billion 2029-30, compared with $36.3 billion in 2024-25.

That 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.”

The fact that the budget only announced $9 billion of new net spending in this fiscal year and next shows how little immediate stimulus it will provide, said Saunders, who arrived at that number by excluding spending that had already been announced.

That included $36 billion for tax relief, $63 billion for defence, $13 billion for infrastructure and $28 billion in other spending, minus $51 billion in government cuts and savings in net spending over a five-year period of roughly $90 billion.

Saunders wasn’t the only economist wary of the budget’s ability to provide stimulus in the near-term.

Bank of Montreal economists Robert Kavcic and Shelly Kaushik said in an analysis of the budget that they estimated net new spending of $4 billion for this fiscal year and 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,” 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,” Kavcic and Kaushik said.

Capital Economics was one of a few outlets that said, following the last interest rate decision, the Bank of Canada might have to start cutting again in 2026. Capital called for two more 25 basis point trims to bring rates below the bottom end of the central bank’s neutral range of 2.25 per cent to 3.25 per cent.

Neutral interest rates neither stimulate nor stifle the economy.

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