Bank of Canada Governor Tiff Macklem informed MPs on Feb. 16 that if the Liberal government increases spending in certain areas, it could interfere with his current efforts to contain inflation. He made this statement while being questioned by the House of Commons finance committee about the effects of government spending on his mission to control inflation as the next budget approaches.
Macklem stated that if there are new fiscal spending plans, they must be taken into account, as it mostly adds to demand. He added that in an economy that is already overheated, this would not be helpful. The Bank of Canada’s governing council said in its January rate deliberations released on Feb. 8 that while the economy is slowing due to rate hikes, there is more excess demand than expected.
Conservative MP and finance critic Jasraj Singh Hallan asked Macklem whether rates would need to be raised if the government increases spending. Macklem replied that if the demand in the economy continues to exceed the supply and inflation does not fall in line with the projection, then that would be the case. The BoC announced its eighth consecutive rate hike in late January, taking its policy rate from 0.25 percent in March 2022 to 4.5 percent currently.
Macklem said he is aware that Canadians are running out of patience with the high cost of living and predicted inflation will drop to 3 percent in the middle of the year, 1 basis point higher than its target of 2 percent. Hallan asked Macklem what assurance he can give to Canadians that his plan will work, given his previous inaccurate predictions on the trajectory of inflation. Macklem responded that he and the BoC have taken forceful action to combat inflation and it is beginning to show results.
Macklem also acknowledged the role domestic policy has played in inflation. He said that during the depths of the pandemic, the government had very expansionary fiscal policy and monetary policy was exceptionally expansionary, which was needed to get out of the “deepest recession in history” and it worked to bring about the “fastest recovery.”
The monetary expansion was realized through quantitative easing (QE), the practice of central banks to purchase government bonds from financial institutions. Conservative MP Marty Morantz mentioned that this has led to the BoC losing money due to the rising rates. He explained that the BoC would usually contribute its earnings to the federal treasury, but now the Finance Department has told the central bank to keep that money. Macklem said the Minister of Finance has indicated that they can retain future gains to offset the losses.
Deputy Governor Carolyn Rogers told the committee that the BoC’s settlement balance is about half of what it was at the peak and the time to rebalance will depend on the path of interest rates. She said that “for that brief period of time, we will run a loss, and we won’t be returning that normal dividend.”