Canada federal budget does not change fiscal track much, says Bank of Canada

Bank of Canada Governor Tiff Macklem takes part in a news conference after announcing an interest rate decision in Ottawa

By Promit Mukherjee

OTTAWA (Reuters) -Bank of Canada Governor Tiff Macklem, who in February said the federal government should avoid a major spending increase, on Friday said this week's federal budget had not significantly altered Canada's fiscal path.

In Tuesday's budget, Prime Minister Justin Trudeau's Liberals promised billions in dollars of additional spending, but also said it would hike taxes. Last November the government released an economic statement saying the 2023/24 federal deficit would not exceed C$40 billion, a target it achieved.

"The net effect of more spending and more revenue is that the fiscal track has not changed significantly since the fall economic statement," Macklem told reporters from an IMF meeting in Washington.

Last November the government vowed to lower the federal debt as a share of GDP for the 2024-25 fiscal year and maintain the ratio declining thereafter, and keep the deficit from exceeding 1% of GDP from 2026-27.

"The budget also commits to those guardrails going forward and that is helpful," said Macklem.

In February, he had said large spending increases in the budget could get in the way of bringing inflation back down to the bank's 2% target.

Macklem said the bank would go through the budget in depth and incorporate the macroeconomic implications in its next set of forecasts, which are due to be issued on July 24.

He reiterated that the bank - which has kept interest rates close to a 23-year high of 5% since last July - would need to see more sustained evidence that inflation was coming down before it could consider a rate cut.

"We're encouraged by the progress we've made ... we're seeing what we need to see, we just need to see it for longer to be confident that the progress towards price stability will be maintained," he said.

Markets see an even chance of a rate cut when the bank makes its next announcement on June 5 while a 25 basis point cut in July is fully priced in.

(Reporting by Promit Mukherjee; editing by David Ljunggren and Jonathan Oatis)