Macklem warns U.S. deficits could push up Canadian borrowing costs

Bank of Canada Governor Tiff Macklem warned that U.S. borrowing is on an unsustainable trajectory as he offered an unusually blunt assessment of American tax and spending policy, which is putting pressure on global bond yields.

“Sustainability of fiscal policy in the United States is a worry. The economy is growing strongly, and deficits are large,” Macklem said in an interview with Bloomberg News. “It’s not on a sustainable track. It needs to get on a sustainable track.”

Macklem, who raised the Canadian benchmark interest rate to 2.5% on Wednesday, was asked to comment on U.S. Treasury Secretary Scott Bessent’s interventions in bond and currency markets, including buying U.S. Treasuries to bring down yields. The governor instead focused on the sharp increase in U.S. federal debt.

Canada’s financial markets are closely integrated with the U.S., Macklem said, meaning some of the increase in longer-term borrowing costs in the U.S. spills over. Higher energy prices and expectations for central-bank interest rate hikes have also put upward pressure on yields. 

The U.S. federal budget deficit widened to nearly $2 trillion for the 2026 fiscal year as spending rose by about 6%, to $7.4 trillion. The U.S. has “got good growth. It has relatively low taxes. It certainly has the scope” to curb deficits, Macklem said. “You know, it’s really a question of political will.” 

It’s unusual, but not unheard of, for the Bank of Canada governor to weigh in on another nation’s fiscal policy. But U.S. borrowing habits appear to be having an impact on the cost of capital for Canadian businesses. 

Alongside heavy corporate debt issuance to finance artificial intelligence investment, high levels of government borrowing globally may be putting upward pressure on longer-term yields, Macklem said.

That’s potentially pushing up Canada’s neutral rate — the place where interest rates neither stimulate nor restrict economic growth, he said. The central bank’s current estimate for the neutral rate is 2.25% to 3.25%.

Macklem said the Bank of Canada isn’t revising its estimate of the neutral rate right now. It revisits that number once a year, in April. 

The U.S. federal deficit is expected at around 6% of the country’s gross domestic product, according to estimates compiled by Bloomberg. Canada’s is seen at about 2%. Prime Minister Mark Carney will provide an update on the country’s finances in budget documents on Nov. 5.

Worried about inflation

In a monetary policy report accompanying the bank’s decision Wednesday, officials removed forecasts for core inflation measures. That’s in part because the Bank of Canada has adopted a new forecasting model, known as Prima, which focuses on total inflation and models its individual components rather than forecasting the bank’s statistical measures of underlying price pressures.

“Core was sort of a shortcut to try to separate the overall forecast from some of the underlying factors. But now we can put it all together in one integrated package,” Macklem said. Market participants can draw out various components of inflation from the new projections, including food, energy, shelter and services.

“What you want to focus on is our target is for total. We’re worried about where total is going to be in the future,” the governor said. 

The bank’s target for inflation is 2%, but its new forecasts suggest it’s unlikely to meet that until 2028. 

The Bank of Canada’s analysis showed a major upward revision to average annual inflation in 2027 — it’s now expected at 3.1%. Previously, it was projected to be 2%, while economists surveyed by Bloomberg were forecasting 2.3%. 

Macklem said a big part of that jump is the expectation that higher energy costs will “pass through” to other consumer prices.

“There’s not much pass-through now,” he said. “But by the time you get into next year, you start to see more pass-through. So, non-energy inflation starts to go up.” 

But Macklem pushed back on the idea that the bank’s new forecasting model led to Wednesday’s hike. He said it’s helpful for analyzing the current shock because it’s “a model that really looks at costs and looks at how costs flow between sectors.”

Macklem’s term as governor is set to end in June 2027. His tenure has been marked by repeated supply shocks, including COVID-19, U.S. tariffs and the war in Iran. During the run-up in prices amid the pandemic, the Bank of Canada and other major central banks were criticized as being too slow to respond.

Asked whether he’d stay at his post if asked to do so, Macklem declined to comment.

“I’ll have more to say in due course on my plans. I think I’ll leave it at that.”

©2026 Bloomberg L.P.

Source: Canadian Mortgage Trends