MNI INTERVIEW:Trudeau Pushes BOC To High-For-Long Rate-Asselin

The Bank of Canada is being pushed into higher-for-longer interest rates by loose fiscal policy as Justin Trudeau prepares for the next election, a former adviser to the prime minister told MNI.

“The government, although they are taking credit for inflation getting down, everything they’ve done on the fiscal side has made it worse,” said Robert Asselin, who assisted Trudeau during his first term and now advises the Business Council of Canada. “Essentially they said to the Bank of Canada, you’re the only player on the ice for this, and you have to basically go hard and control this beast,” Asselin said on MNI's FedSpeak podcast.

Bank Governor Tiff Macklem raised rates for the 10th time in this cycle on July 12, taking the benchmark to the highest since 2001 at 5%, and says he's prepared to do more if needed. Officials also said that while they want to avoid overtightening, inflation will remain above the 2% target until mid-2025.

“I feel for the governor of the Bank, he has a lot on his shoulders and he needs to get this right,” Asselin said. Even with success so far in avoiding a recession, “the result is higher interest rates for longer, this will get trickier.” (See: MNI INTERVIEW2: BOC Overdoing Hikes, UWO's Williamson Says)

It is too early to anticipate a soft landing given that tight monetary policy will hurt Canada's shaky business investment, Asselin added. “You do have stagflation, where the economy is anemic and as a result of your fight against inflation; because you are trying to hold and make sure inflation doesn’t go back up, you keep interest rates higher for longer, and I don’t think that’s a great outcome.”

CABINET SHUFFLE CHANGES LITTLE

Trudeau's cabinet shuffle last Wednesday showed he's pressing ahead with expansive policies as he sets himself up to run for a fourth term in an election due by 2025. He also expressed confidence in Finance Minister Chrystia Freeland despite the absence of any plan to balance the budget and for an industry minister overseeing subsidies to foreign companies creating jobs.

“Everything I know about Prime Minister Trudeau makes me believe he’s absolutely running for another term,” Asselin said.

“What we learned from his cabinet shuffle is we aren’t planning to change direction, which I think is a policy mistake,” said Asselin, who also counseled former finance minister Bill Morneau. “I do think given the economic situation has changed so much since they came to office that you do need a change of direction given high inflation.”

Yet holding the course on deficit spending is not without political danger for the prime minister, with polls showing the opposition Conservatives gaining as they attack the government over cost of living issues. Asselin said the current policy mix is further denting Canada's standard of living.

“Even if you bring inflation down to 2%, let’s say in a good scenario, next year, you’re going to deal with an affordability crisis for many years because obviously what matters is prices, and prices have gone up significantly,” Asselin said. “There’s no quick fix to that and the government I think will suffer from that, and I suspect this is why you see the polling numbers being so unfavorable.”

Ways the government can turn things around include faster approval of major resource projects, making sure housing supply catches up with demand and subsidizing research, he said. Canada's luster as a supplier of critical minerals and energy has also been tarnished.

“If it takes 15 years to build a mine for critical minerals, I think most countries will look elsewhere, that we need to fix,” Asselin said. “Are we really a world leader on energy security and providing the world what it needs? Those I think are big question marks.”