Government Spending Hindering Bank of Canada Efforts to Lower Inflation: Governor

BoC governor Tiff Macklem says it would be easier to get inflation down if monetary and fiscal policy were ‘rowing in the same direction.’

Bank of Canada Governor Tiff Macklem holds a press conference in Ottawa on April 12, 2023. The Canadian Press/Sean Kilpatrick

Attempts by the Bank of Canada (BoC) to tame inflation by raising interest rates have been hampered by the increased spending from all levels of government, says BoC governor Tiff Macklem.

“If all those spending plans are realized, government spending will be adding to demand more than supply is growing. And in an environment where we’re trying to moderate spending and get inflation down, that’s not helpful,” Mr. Macklem said during an interest rate announcement on Oct. 25.

“Governments are hearing from their constituents. They are thinking more about the impact of inflation, they’re thinking more about the impact of higher interest rates.”

The federal and provincial governments’ projected 2.5 percent increase in spending, contrasted with Canada’s expected two percent economic growth, could add “undue inflationary pressures,” Mr. Macklem told reporters.

He added that it would be easier to get inflation down if monetary and fiscal policy were “rowing in the same direction.”

The Bank of Canada held its policy interest rate at five percent on Oct. 25, while also downgrading its growth forecast for Canada’s economy.

“We decided to hold the policy rate today because we are seeing clear evidence that higher interest rates are slowing the economy. That’s cooling inflation. But we did leave the door open to raise interest rates if needed,” Mr. Macklem said.

Conservative Leader Pierre Poilievre brought up Mr. Macklem’s announcement during Question Period on Oct. 25, highlighting three elements from the report.

“First, inflationary risks have increased. Second, he is considering raising interest rates again, and third, the government’s deficits and spending are driving up inflation, which is also increasing the risk of interest rate hikes.”

Prime Minister Justin Trudeau said a Conservative government would offer “austerity and budget cuts” at a time when Canadians were struggling with affordability.

Mr. Poilievre was quick to respond.

“The disagreement is not with me, but with the Governor of the Bank of Canada, who said today that government spending is driving up inflation,” he said.

Mr. Trudeau said the Canadian government had maintained its triple A credit rating and managed to obtain the lowest deficit and best debt-to-GDP ratio in the G7.

“We do not need the Conservatives’ budget cuts. We can be there in a responsible way to help Canadians, create growth and maintain our fiscal responsibility,” he said.