Kevin Carmichael: 3 things the Bank of Canada subtly told us at its quarterly press conference CarmichaelKevin
Ideally, monetary policy and fiscal policy complement each other. But it rarely works that way. After the Great Recession, former prime minister Stephen Harper was in a hurry to balance the budget. The economy was still weak, so the Bank of Canada was forced to keep interest rates lower for longer to offset deflationary forces. Easy money stoked the housing bubble.
Now, Prime Minister Justin Trudeau and many of the premiers are throwing money around, despite the most dangerous burst of inflation in four decades. That’s making the Bank of Canada’s job that much harder. Interest rates will probably be higher for longer, risking an extended period of slow economic growth.
Budget season ended with so many spending promises that the central bank felt compelled to devote a section of its latest Monetary Policy Report to fiscal policy. Policymakers described spending growth in the second half of 2022 as “robust,” and predicted that spending “will contribute steadily” to GDP growth over the next couple of years.
Macklem told reporters that all these fiscal measures neither help nor hurt his efforts to lower inflation. “Government spending plans are not contributing to the slowing of growth in our projections but at the same time they are not standing in the way of getting inflation back to target,” he said.Article content
So, it could be worse. But it’s fair to ask whether the fiscal authorities could be helping the Bank of Canada get inflation back to target, rather than just staying out of the way. “It’s a stretch to believe that government spending plans motivated the to upgrade growth but this has no effect on inflation risk,” Derek Holt, an economist at Bank of Nova Scotia, said in a note to his clients.
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