Increased government spending ‘doesn’t help much’ in fighting inflation, Macklem told commission

Bank of Canada Governor Tiff Mackrem told lawmakers on February 16 that higher spending by Liberal governments in some areas could undermine current strong approaches to contain inflation. rice field.

Mackrem, who testified before the House Finance Committee, questioned the impact of government spending on his inflation-fighting mission as the next budget approached.

“If there’s a new fiscal spending plan, we’re going to have to incorporate it,” said Macklem, adding that some spending will mostly be in addition to demand.

“In an environment where the economy is already overheating, it doesn’t help much.”

The Board of Governors of the Bank of Canada (BoC) said in its January interest rate deliberations released on February 8 that there is more than expected excess demand while the rate hike is slowing the economy.

The council said it would pause rate hikes for the time being to wait for developments.

Conservative MP and financial commentator Jasraj Singh Hallan asked Macklem whether interest rates should be raised if the government spends more.

“Certainly if the economy’s demand continues to outstrip the economy’s supply and inflation doesn’t go down in line with our projections,” Mackrem replied.

The BoC announced its eighth consecutive rate hike in late January, raising the policy rate from 0.25% in March 2022 to the current 4.5%.

Macklem said banks were taking appropriate steps to combat inflation and it was starting to work.

Inflation, as measured by the Consumer Price Index (CPI), topped 8% in the summer and was at 6.3% in December.

Mackrem said he was “very aware” that Canadians’ patience had “run out” with the high cost of living, and predicted that inflation would fall to 3% by the middle of the year, with the target 1 basis point higher than 2% of

Hallan asked Macklem what assurances he could give Canadians that his plan would work, given previous inaccurate predictions about the trajectory of inflation.

macklem had Said In July 2020, a long period of very low interest rates was expected.He also Said In October 2021, inflation was temporary.

“What I can assure the Canadian people is that when we saw the economic momentum really picking up and inflation picking up, we acted quickly and forcefully,” Macklem said.

While the Macklem and Trudeau governments have focused on global factors fueling inflation, such as supply chain problems stemming from the pandemic and the war in Ukraine, Macklem acknowledged the role domestic policies play.

“To the depths of the pandemic, the government had a very expansionary fiscal policy and a very expansionary monetary policy,” he said.

The governor said it was necessary to get out of “the deepest recession in history” and that it worked to achieve “the fastest recovery.”

“We’re on the other side of that now, dealing with side effects.”

In layman’s terms, a monetary expansion that created more money was achieved through quantitative easing (QE), the practice of central banks buying government bonds from financial institutions.

Conservative MP Marty Morantz said this has led to the BoC losing money due to higher interest rates.

He spoke about how the BoC normally contributes its earnings to the Federal Ministry of Finance.

“Do you agree that this arrangement is essentially Canadian taxpayers bailing out the Bank of Canada for the quantitative easing program?” asked Morantz.

“The finance minister has shown that we can basically retain future gains to offset losses,” said Macklem.

“Even though all the major central banks have engaged in quantitative easing, we are all facing a similar situation. is also small.”

Deputy Governor Carolyn Rogers told the commission that the BoC’s settlement balance was about half of its peak and the timing of the rebalancing would depend on interest rate developments.

“For that short period of time, we have made losses and cannot return our normal dividends,” she said.