The governor of the Bank of Canada says the country’s inflation rate would drop more quickly if future government spending was lower.
Tiff Macklem made the comment in a Feb. 1 session of the House of Commons Standing Committee on Finance.
“If government spending turns out to be slower than we expected, yes, there'll be less demand pressures from government, and that means growth will probably be lower, the unemployment rate will be a bit higher, and inflation will come down a bit sooner,” said Mr. Macklem, responding to a question from Conservative MP Marty Morantz.
The session, part of the committee’s ongoing discussions on the Bank of Canada’s monetary policy report, provided insight into the central bank’s strategy to combat inflation while acknowledging current economic challenges.
Mr. Macklem acknowledged that government spending is factored into the bank’s fiscal policy, which he said is partially contributing to the Canadian economy’s growth.
Government spending is at the “upper end of potential,” Mr. Macklem said.
“So, if governments were to add more spending, it could start to get in the way of getting inflation back,” he said. “And that would not be helpful.”
Liberal MP Yvan Baker posed a question about growing government spending. “Is the fall economic statement, which is the latest spending plan of the government, adding undue inflationary pressures to the Canadian economy?”
If government spending is growing “in the range of 2 percent, the economy is growing,” Mr. Macklem answered. “It’s not helping to get rid of inflation, but it’s not contributing new inflationary pressures.”
He explained the central bank’s decision to maintain the interest rate at 5 percent, while continuing quantitative tightening, or reducing money supply. As a result, monetary policy is effectively mitigating price pressures, but patience is needed as higher interest rates take time to influence the economy.
Although economic growth slowed around mid-2023 and was exacerbated by higher prices and interest rates, past rate hikes initiated a rebalancing of the economy, contributing to a decrease in inflation, said Mr. Macklem.
The decrease was further supported by lower energy prices and improvements in global supply chains, he said, although inflation remains higher than desired, showing there are persistent underlying pressures that require interest rates be kept at current levels.
NDP MP Daniel Blaikie asked if there is an ideal interest rate that the central bank is aiming for.
“The ideal interest rate is the one that gets us the 2 percent inflation,” Mr. Macklem responded.
The discussion also touched on the significant impact of the housing market on inflation, with home costs remaining high due to factors such as rising mortgage interest costs and higher rents.
Bloc Québécois MP Gabriel Ste-Marie asked about the negative effects of a restrictive monetary policy on the housing sector, such as a significant drop in new housing starts and the burden on renters and mortgage holders. Mr. Macklem acknowledged the policy interest rate is both the primary tool for controlling inflation and a “blunt instrument” that affects demand and, consequently, inflation. Addressing specific challenges in the housing market, such as shortages, requires targeted measures beyond the central bank’s monetary policy.
Mr. Macklem emphasized that governments at all levels need to collaborate on and implement fiscal measures such as taxes and grants to directly address housing construction and reduce shortages.
