Governments have an interest in limiting increases in their spending over the next year if they want inflation and interest rates to return to normal, the governor of the Bank of Canada warned Monday.
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Tiff Macklem explained to federal elected officials, in a parliamentary committee, that governments’ budgetary policies will influence the return of inflation growth to 2%, the Bank of Canada’s target rate. As a reminder, the inflation rate was 3.8% over one year in Canada in September, almost double the target.
Pressed with questions from the Conservatives, Mr. Macklem assured that government spending has not been problematic so far in combating inflation, but that it could become so.
“During the last year, government spending, federal and provincial, grew by less than 2%, according to our estimates, so it does not harm in reducing inflation. In the future, our estimate is that these expenses will increase slightly faster, and, in that case, yes it could start to be more difficult to reduce inflation,” assessed the governor.
Mr. Macklem explained last week that he no longer expects to have to raise the Bank of Canada’s key rate again, on which banks base their loans. The Bank has maintained it, for a second time in a row, at 5%, and is now counting on the economic slowdown caused by this high rate to finally bring inflation under control.