Governments have an interest in limiting increases in spending next year if they want inflation and interest rates to return to normal, the Bank of Canada governor warned Monday.
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Tiff Macklem told federal elected officials at a parliamentary committee that governments’ fiscal policies will influence the return of inflation growth to 2%, the Bank of Canada’s target rate. As a reminder, inflation in Canada was 3.8% year-on-year in September, almost double the target.
Pressed on questions from Conservatives, Mr Macklem assured that government spending had not been a problem in tackling inflation, but could become so.
“Last year, we estimate that federal and provincial government spending increased by less than 2%, so this does not hurt the reduction in inflation. We expect that this spending will increase a little faster in the future and in this case it may actually become more difficult to reduce inflation,” the governor assessed.
Mr. Macklem said last week that he no longer expects to have to raise the Bank of Canada’s key interest rate again, on which banks base their loans. The bank has kept it at 5% for the second day in a row and now expects that the economic slowdown caused by this high rate will finally bring inflation under control.