MNI BRIEF:Macklem-Fiscal Policy Turning Unhelpful On CPI Fight
Bank of Canada Governor Tiff Macklem told reporters Wednesday government spending may soon be working at cross purposes with interest rate hikes aiming to bring inflation back to target, about as far as he's gone yet on a subject of intense political debate.
The economy's potential growth rate is about 2% while recent federal and provincial budgets suggest government spending will quicken beyond that mark to around 2.5% over the next year, Macklem said after holding his key lending rate at the highest since 2001 at 5%. Officials are prepared to hike again if inflation appears to be sticking above target, the Bank's decision said.
“It’s going to be easier to get inflation down if monetary and fiscal policy are rowing in the same direction,” Macklem said. “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,” he said. “It would be helpful if governments considered the inflationary impact of their spending decisions.”
Finance Minister Chrystia Freeland has said a fiscal update due in coming weeks will focus new measures on tackling a housing squeeze, while Conservatives leading in polls have said big deficits forced the Bank to jack up borrowing costs. (See: MNI INTERVIEW: Trudeau Must Fix Housing Without Fanning Prices)
Canada's path to a soft landing has become even narrower in recent months, Macklem said, adding he doesn't see a major recession or 1970s-style stagflation. “Stagflation to me is a period of high inflation and high unemployment, that’s not what we’re in now,” he said. Top deputy Carolyn Rogers reiterated no major discussion of rate cuts can happen until inflation is firmly heading back to the 2% target.