07:41 AM EST, 11/05/2025 (MT Newswires) -- The Canadian dollar (CAD or loonie) is a touch weaker at $1.413/USD (70.8 US cents), and Canadian yields actually rallied slightly in the wake of Tuesday's federal budget --while the deficit was big, markets were braced for worse, said Bank of Montreal (BMO).

The bank pointed out that the budget still has to pass a confidence vote, and most expect the NDP will either provide the few votes needed or abstain to allow the document to pass.

The highly anticipated 2025 budget lands in the middle of a trade dispute with the United States, and at a time when the economy is struggling to grow, noted BMO. Against that backdrop, the newly elected federal government has tabled a budget full of spending, tax relief, a push for private-sector investment, more efficient government operations, and significantly deeper deficits.

Broadly, this is an economically favourable pivot from the deficit budgets run by the prior government, but also comes with what looks like a substantial structural deficit down the road. The bank stated it will stop short of calling it transformational and il will also stop short of pulling the fiscal alarm.

The FY25/26 budget deficit is estimated at $78.3 billion, or 2.5% of gross domestic product, about in line with what was expected, before narrowing somewhat to $65.4 billion (2.0% of GDP) for FY26/27, adde BMO. There is no path back to balance in the forecast from these levels, and deficits persist above $50 billion by FY29/30, or around 1.5% of GDP, even when the economy returns to sturdy potential growth.

Net new stimulus runs at roughly $20 billion, or about 0.6% of GDP, for FY25/26 and $22 billion for FY26/27, including the many policy measures already announced in recent months -- such as personal income tax reduction and increased defense spending. Relative to what was already announced ahead of Budget Day, the bank judges that there's roughly $4 billion (0.1% of GDP) in incremental new announcements for FY25/26 and somewhat more for FY26/27.

The important takeaway here is that there is indeed a large wave of stimulus hitting the economy, but BMO already knew about the vast majority of it, and as suchwon't be scrambling to sharply revise up its growth forecast in the wake of this budget.

Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers will be testifying to the Housing Standing Committee on Finance at 4:30 p.m. ET on Wednesday. BMO estimates some grilling on the latest monetary policy decision.