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MNI INTERVIEW:BOC May Tighten As Spring Budget Keeps Taps Open


Canada's fiscal push will "underpin" the BOC's likely path, former Finance Department official Young says.

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The Bank of Canada may be pulling back on stimulus to curb inflation next spring just as the government introduces a budget aimed at cashing in CAD78 billion of election campaign promises, former finance department official Rebekah Young told MNI.

"It is going to be the Bank of Canada that is going to be leading the exits from this pandemic," likely starting in April, said Young. "They can more or less expect that CAD78 billion to be put into the system and more or less baked into their forecasts" at the next rate meeting in January, she said.

"It's not enough to say that it would pull rates rate forecasts much earlier, more aggressive, just kind of underpin the direction that they're already leaning," Young said. Some investors are betting on a hike to the 0.25% policy rate in January or March, ahead of the BOC's guidance for the middle quarters of next year.

Finance Minister Chrystia Freeland on Tuesday delivered a fiscal update that largely plugged in stronger economic numbers reflecting the re-opening and limited new spending to the ongoing fight against the pandemic, leaving out most promises made ahead of September's election, said Young, now an economist at Scotiabank.


BOC Governor Tiff Macklem on Wednesday noted inflation of 4.7% is well above his 2% target and will remain elevated through the first half of next year and like Freeland's update noted the rebound in jobs and the economy's gaining strength.

Freeland has wound down most household and business relief programs used at the height of the pandemic, and has said the last round of payouts of less than CAD10 billion will likely end in May. The continued fiscal support will counter BOC tightening, at a time when Canadians are being squeezed by record housing costs and surging food and gasoline prices.

"We might be in that scenario in the winter if the Bank of Canada is tightening its policy rate and Finance Canada is still providing lots of stimulus. So you've got one kind of pulling and the other pushing," Young said.

Spending on some larger election promises in the next budget likely won't dramatically change inflation or the Bank of Canada's likely tightening path, Young said. Other risks include the omicron variant slowing demand in the near term, tighter labor markets with unemployment around 6% that could fuel wage inflation, and supply bottlenecks that could take years to be resolved.


Elevated job vacancies and long-term unemployment will help the government build the case for more spending in the next budget, she said, and Freeland can also judge how bad inflation is as she prepares the fiscal plan.

A continuing economic recovery may also create a fiscal windfall that would allow for new spending without greater deficits, especially as immigration flows return and employers fill more jobs. Young also said Canada has some time before having to decide about creating a tougher "fiscal anchor" than the current goal of lowering debt to GDP.

"It's more about if there's another recession and we want to be in a position that we can again fire away with fiscal support," Young said. "When the economy is strong and we're at full employment and businesses are producing at capacity, that's when the government can start withdrawing some of its fiscal deficit support and the private sector will just take over and that really won't hurt growth.

"But the problem is if you do it when the economy's already starting to slow then you'll just exacerbate that slowdown."