Bank of Canada says Ottawa's plans are not stoking inflation pressure - for now

Macklem's message to lawmakers

Appearing before the House of Commons finance committee on Tuesday, Tiff Macklem outlined two circumstances when he would weigh in on fiscal choices: if public finances looked unsustainable and began to disrupt markets, or if tax and spending were pulling against monetary policy in the push back to 2% inflation. "In the current circumstances, I don't think either of those criteria are met," he said.

He argued existing spending plans are not materially adding to price pressure, citing economic slack and a tilt toward investment rather than day to day operations. Macklem also pressed the importance of how money is deployed, asking, "Are they spending it on things that are just going to boost the economy in the short term, or are they investing for the future and building the capacity of the economy to grow?" He has previously faulted provincial and federal programs for leaning too much on demand and consumption instead of expanding productive capacity.

Rates, timing and forecasts

The central bank lifted its policy rate to 2.5% last week to stop costlier oil from fanning wider inflation. It was the first hike in more than three years. Macklem added there may be a case to tighten further, but said officials will move carefully while uncertainty remains elevated.

In prepared remarks, his view was that the economy should pick up in 2027, powered by firmer exports and investment, "supported by fiscal measures." He noted last week that the bank's investment assumptions were "conservative," even though they were one of the biggest upward revisions relative to July.

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Budget signals and the pushback

The federal budget arrives Thursday. Mark Carney has already announced a "productivity mega deduction" that would expand immediate tax write offs for business investment, with an estimated cost of C$36 billion over five years. The overall deficit in the plan is expected to be roughly 2% of GDP.

Not everyone sees policy alignment. Doug Porter, the Bank of Montreal's chief economist, said, "Fiscal policy is geared to providing important support to the economy through this difficult period of trade uncertainty," and added, "I believe that monetary and fiscal policy are working at cross purposes." He said that view could shift if Canada and the US strike a deal that eases trade uncertainty and lowers tariffs.

Why it matters for your portfolio

The takeaway is straightforward. The Bank of Canada just restarted hikes to contain broader price spillovers, is open to doing more, and says current federal plans are not undermining that effort. Meanwhile, investors should expect investment focused incentives and an anticipated deficit near 2% of GDP in the budget, with the growth outlook in 2027 leaning on exports and capital spending.

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