Bank of Canada governor Tiff Macklem says fiscal and monetary policy are rowing in opposite directions, making it harder to bring inflation down.
Macklem appeared before MPs on the House of Commons finance committee on Monday after the Bank of Canada's recent rate decision and quarterly economic projections.
In response to questioning from Conservative MP Jasraj Singh Hallan, Macklem said government spending is working at cross purposes with the central bank's efforts to bring inflation down.
The governor said that according to federal and provincial budgets, government spending aggregate will grow faster than supply in the economy over the next year, adding upward pressure to inflation.
"It would be helpful if monetary and fiscal policy was rowing in the same direction," Macklem said.
At the same time, the governor said it's important to compare Canada's fiscal stance to other countries.
"You have to compare Canada to other countries. Canada's deficit-to-GDP ratio is the lowest in the G7," Macklem said.
The initial run-up in prices during 2022 was largely attributed to global circumstances, including supply chain disruptions and the Russian invasion of Ukraine.
Government spending, however, has also been scrutinized as the central bank has pointed to domestic inflationary pressures as well.
Since March 2022, the Bank of Canada has rapidly hiked rates to clamp down on spending and bring down inflation.
As the economy bends under the weight of higher borrowing costs, the Bank of Canada opted to maintain its key interest rate at five per cent last week, but left the door open to more rate hikes if inflation remains high.
The Bank of Canada is expecting the country's annual inflation rate, which came in at 3.8 per cent in September, to return to two per cent in 2025.
This report by The Canadian Press was first published Oct. 30, 2023.
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The Bank of Canada has rapidly hiked interest rates over the last year. Since there has been a build-up of government bonds outstanding and higher levels of interest-bearing commercial bank deposits at the central bank, billions of dollars in interest payments are now being delivered into private sector hands, a stimulus that could mean a hotter economy, more inflation, and an on-going cycle of additional rate increases.
Though Bank Governor Tiff Macklem seems unworried about corporate welfare bestowed on wealthy bond-holders, he has expressed concern about increasing wages, and wants government to spend less, which usually affects have-nots more than haves.
Instead of using fiscal and monetary policy to punish the poor and reward the rich, we should analyze the main drivers of inflation. For those within our power to manage (e.g. clamping down on corporate price-gouging}, action should be taken. For global factors beyond our control such as wars affecting grain and energy prices, we should subsidize the cost of food and heating for our most vulnerable citizens until conditions improve.
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