(Ottawa) The Governor of the Bank of Canada, Tiff Macklem, believes that the federal government’s new budgetary safeguards, unveiled in its fall economic statement, are useful for monetary policy.
During a press briefing on Wednesday, Tiff Macklem commented on the federal government’s updated budget projections as well as new rules aimed at limiting deficits.
“From a monetary policy perspective, the Autumn Economic Statement suggests that the Government will not add new or additional inflationary pressures over the next two years, which is the critical period during which we will seek to reduce inflation and bring it back towards the target,” Macklem said.
The fall economic statement contains commitments on how the federal government will approach its finances, including a goal of keeping deficits below 1% of gross domestic product (GDP) from 2026-27.
The Liberals also aim to keep the current fiscal year’s deficit at or below the $40.1 billion projected in the spring budget and reduce the debt-to-GDP ratio in 2024-25 compared to the 2024-25 forecast. the fall economic statement.
The new budget targets come as the federal government is called upon to avoid fueling inflation with new spending and to take into account the impact of the economic slowdown on public revenues.
Macklem has previously called for fiscal policy to move in the same direction as monetary policy, noting that overall, spending plans from all levels of government for next year risk fueling inflation .
Earlier in the day, the governor delivered a speech to the Saint John Area Chamber of Commerce in New Brunswick, in which he warned that it would be a serious mistake to fight inflation in a timid manner and suffer the consequences.
He acknowledged that interest rates may already be high enough to bring inflation back to its target, but he reiterated that the central bank was prepared to raise rates further if inflation did not fall.
His public appearance came a day after the release of new inflation figures showing that inflation slowed to 3.1% in October in Canada.
In his speech, Mr. Macklem compared the fight against inflation today to that of the 1970s, highlighting the similarities and differences between the two periods.
Inflation in the 1970s was also triggered by world events, he recalled, leading to consequences similar to those of today: people felt shortchanged because their wages did not keep up with the cost of life and strikes were long and frequent.
Although policymakers experimented with price and wage controls as well as slowing the growth of the money supply, the governor stressed that these policies were ineffective.
“And the government and the central bank were not prepared to stay the course, that is, to restrict government spending and tighten monetary policy enough to eliminate inflationary pressures in the economy,” he said. Mr. Macklem.
The consequence, he says, is that Canadians lived with high inflation for more than a decade, and by the time policymakers realized they needed to do more, inflation was already well entrenched in the economy.
“The biggest lesson we learned from the 1970s is that tackling high inflation timidly — and living with stress, labor strife and uncertainty — would be a big mistake,” the governor added.
The Bank of Canada responded to rising inflation starting in March 2022 by rapidly raising interest rates to their highest level in decades. Aggressive rate hikes have slowed spending as people face higher borrowing costs, especially many who own homes with mortgages.
“The tightening of monetary policy is working, and it is possible that interest rates will now be restrictive enough to restore price stability,” Macklem said Wednesday.
Canada today has two advantages over the 1970s for the governor: People expect inflation to fall again in the long term, and the Bank of Canada has responded vigorously this time around with rate hikes. energetic rates.
“And I know that while our rate hikes lower inflation, many Canadians see them as an additional cost,” he said in his speech. “But they ease price pressures across the economy. If we stay the course, the results will be worth it. »