Bank of Canada Governor Says Budget Update Won’t Add New Inflationary Pressures

Tiff Macklem says the budgetary balance is ‘little changed’ relative to what it was in the budget earlier this year.

Bank of Canada governor Tiff Macklem speaks during a news conference following an interest rate announcement, in Ottawa on Oct. 25, 2023. The Canadian Press/Adrian Wyld

Bank of Canada Governor Tiff Macklem says the budget update tabled Tuesday by the Liberal government won’t be adding new inflationary pressures.

“The budgetary balance is little changed relative to what it was in the budget earlier this year, so that means it’s not adding or subtracting over that horizon,” said Mr. Macklem during a Nov. 22 talk before the Saint John Region Chamber of Commerce in New Brunswick.

“So from the perspective of monetary policy, the fall economic statement suggests that the government is not adding new or additional inflationary pressures over the next couple of years.”

Mr. Macklem said that period is “critical” as the central bank attempts to return inflation to its target of two percent.

The governor took questions from the audience and from reporters but was circumspect when asked questions about government policy or the fall economic statement tabled by the Liberals on Nov. 21. He said he would not comment on specific measures announced.

The statement predicts a deficit of $40 billion for fiscal year 2023–2024, which is $100 million lower than what was projected in Budget 2023.

But for the three subsequent fiscal years, the fall economic update indicates Liberals expect to have much higher deficits than projected in Budget 2023.

The deficit is expected to be $38.4 billion in 2024–2025 instead of $35 billion, $38.3 billion in 2025–2026 instead of $26.8 billion, and $27.1 billion in 2026–2027 instead of the $15.8 billion projected in Budget 2023.

Mr. Macklem was more blunt about government actions when testifying at the House of Commons finance committee on Oct. 30, when he said it would be “helpful if monetary and fiscal policy was rowing in the same direction.”

“Any standard economic textbook will tell you [that] if you cut government spending, that will tend to slow growth, raise the unemployment rate, and reduce inflation.”

‘Most Rapid Tightening’

The Bank of Canada dramatically increased the money supply during the era of COVID-19 restrictions, while the government was providing financial relief to Canadians affected by lockdowns.

The combination of excess demand and reduced supply caused by economic shutdowns spurred the current inflationary bout.

The central bank reacted by conducting the “most rapid tightening of monetary policy in history,” said Mr. Macklem, with the raising of rates from 0.25 percent in March 2022 to 5 percent in July 2023.

Scotiabank said last week it calculated that 2 percent out of the 4.75 percent rise in interest rates was attributable to “government consumption and pandemic transfers to households.”

The governor said the current rate will have to be maintained until the bank can see a clear downward trend in core inflation.

Mr. Macklem welcomed the latest inflation reading of 3.1 percent, down from 3.8 percent the previous month, but he said “one month is not a trend” and pointed to volatility in the economy.

“So when we see a clear trend that we’re clearly going back to two [percent], it'll be time to start discussing whether it’s time to lower interest rates.”

While not criticizing the government’s fiscal policy, Mr. Macklem alluded to the period of stagflation (weak growth and elevated inflation) in the 1970s and said policymakers at the time weren’t willing to restrict government spending and tighten monetary policy.

“It took very high interest rates and a deep recession to break inflation,” he said, pointing to the bank’s policy rate reaching 21 percent in 1981.

Mr. Macklem says it’s important to stay the current course and said he’s confident inflation can be brought down in the target range quicker and at a lower cost.

He also sees a positive impact on inflation with Canadians facing elevated mortgage renewals. An RBC report from Oct. 30 estimates that $186 billion worth of mortgages are due for renewal in 2024 and many Canadians will face a “payment shock.”

“Households that are having real difficulty paying their mortgages are not households that are contributing too much to spending in the economy,” said Mr. Macklem, which reduces demand.

“And to the extent that the people that are really having difficulty, there’s a way for them to work through those difficulties. That’s a good thing for everybody.”