Inflation Would Be Lower if Ottawa Had Spent Less on Pandemic Stimulus: Bank of Canada Governor

Bank of Canada Governor Tiff Macklem prepares for a press conference in Ottawa on Dec. 15, 2021. (Justin Tang/The Canadian Press)

Canada’s current inflation rate of 6.9 percent would have been lower if the federal government had spent less on pandemic stimulus or stopped stimulating the economy earlier, says Bank of Canada Governor Tiff Macklem.

Macklem appeared before the House of Commons finance committee yesterday, where he faced questions from all parties about his thoughts on rising interest rates, inflation projections, and how both could have been eased if different actions had been taken.

“A unique event happened in terms of the government’s fiscal position over the last two-and-a-half years, which is they have borrowed an additional $500 billion, ballooned the deficit from $725 billion to $1.2 trillion,” said Conservative MP Marty Morantz on Nov. 23.

“Doesn’t that event in and of itself become a factor that would cause increased inflation?”

Macklem replied saying that the bank would have acted differently if it “knew everything today a year ago.”

“Yes, I think we should have started tightening interest rates sooner,” he said.

Morantz then asked, “If the deficit spending had been half of that, $250 billion instead of $500 billion, would inflation have been less?”

Macklem responded that “there would have been less stimulus in the economy. ... There would have been less demand.”

When Morantz asked again, “Yes, it would have been less?” referring to inflation from his original question, Macklem said, “Yes.”

Less than a month ago, Macklem told the Senate banking committee that he believed a severe recession in the coming months to be unlikely.

“Growth for the next three quarters is roughly zero, which means we’re just about as likely to have a couple of quarters of negative growth as we are to have a couple of quarters of positive growth,” he said on Nov. 1.

“It’s not a severe recession. It’s not a major contraction. But you could certainly get a couple of quarters of negative growth.”

Chance of Recession

Macklem reiterated yesterday that growth is likely to be about zero in the current and next two quarters.

“The economy is slowing. We anticipate that growth will be about zero for three quarters,” he said, noting that “the second part of the year in 2023 will be a return to growth.”

As for inflation, the central bank expects that “it will stay quite high for the rest of this year [but] will start to decline next year,” falling to 3 percent by the end of 2023.

“And then eventually 2 percent,” Macklem added. “It will take time. What we’re seeing is that monetary policy is starting to have an impact.”

The Bank of Canada raised its key interest rate by 50 basis points, representing half a percentage point, on Oct. 26, bringing the rate up to 3.75 percent. The BoC has now raised interest rates six consecutive times since March.

Macklem is expected to announce another rate hike in December, as the bank stated in October after the most recent hike that it “expects that the policy interest rate will need to rise further.”

“I’ve visited food banks and the situation is dire. I won’t hide that it’s very dire. But what I’m hearing today is that we’re going to suffer right now but good news is on the way,” Liberal MP Sophie Chatel said during yesterday’s committee meeting.

She asked Macklem, “What is the message that you have today for people who are suffering?”

“Some Canadians are being really squeezed. We understand,” Macklem responded in a later part of the meeting.

“We’re out there promising Canadians that inflation is going to come down, but they’re only going to be convinced when they start to see it come down,” he said.

The Canadian Press contributed to this report.