Bank of Canada Governor Tiff Macklem told MPs on Feb. 16 that if the Liberal government increases spending in some areas it could hurt his current forceful approach to rein in inflation.
Testifying before the House of Commons finance committee, Macklem took questions about the impact of government spending on his inflation fighting mission as the next budget approaches.
“If there are new fiscal spending plans, we'll have to take those on board,” he said, adding that some spending mostly adds to demand.
“In an environment where the economy’s already overheated, that wouldn’t be terribly helpful.”
The council said it would pause hikes for the time being to let developments unfold.
Conservative MP and finance critic Jasraj Singh Hallan asked Macklem whether rates would need to be raised if government increases spending.
“Well, certainly if demand in the economy continues to run ahead of supply in the economy, and inflation does not come down in line with our projection,” Macklem replied.
The BoC announced an 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 the Bank has taken appropriate action to tackle inflation and that it’s starting to work.
Inflation, as measured by the Consumer Price Index (CPI) was over 8 percent in the summer and the latest December reading was at 6.3 percent.
Macklem said he was “acutely aware” that Canadians’ patience is “running out” with the high cost of living and predicted inflation will go down to 3 percent in the middle of the year, 1 basis point higher than its target of 2 percent.
Hallan asked Macklem what assurances he can give to Canadians his plan will work given previous inaccurate predictions on the trajectory of inflation.
“I think the assurance I can give to Canadians is we have acted forcefully as soon as we saw the momentum in the economy really picking up and inflation rising,” he said.
Macklem and the Trudeau government have focused on the global factors fuelling inflation, such as pandemic-derived supply chain issues and the war in Ukraine, but the governor acknowledged the role played by domestic policy.
“Through the depths of the pandemic, the government had very expansionary fiscal policy, and monetary policy was also exceptionally expansionary,” he said.
He said that was needed to get out of the “deepest recession in history” and it worked to accomplish the “fastest recovery.”
“We now are on the other side of that and we’re dealing with the side effects.”
The monetary expansion, which in plain terms creating more money, was realized through quantitative easing (QE), the practice of central banks to purchase government bonds from financial institutions.
Conservative MP Marty Morantz remarked that this has led to the BoC losing money due to the rising rates.
He spoke about how the central bank would typically contribute its earnings to the federal treasury, about a billion dollars a year, but now the Finance Department has told the bank to keep that money.
“Would you agree that essentially this arrangement amounts to Canadian taxpayers bailing out the Bank of Canada because of its quantitative easing program?” asked Morantz.
“The Minister of Finance has indicated to us that we can basically retain future gains to offset the losses,” said Macklem.
“Every major central bank has engaged with QE, we’re all faced with a similar similar situation. In fact, Canada’s balance sheet as a proportion of GDP is smaller than most.”
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.
“For that brief period of time, we will run a loss, and we won’t be returning that normal dividend,” she said.
