Fiscal and monetary policy rowing in opposite directions, Macklem says

Bank of Canada Governor Tiff Macklem says fiscal and monetary policy are rowing in opposite directions, making it harder to bring inflation down. 

Macklem is appearing before MPs on the House of Commons finance committee after the Bank of Canada's recent rate decision and quarterly economic projections. 

In response to questioning from Conservative MP Jasraj Singh Hallan, the governor says government spending is working at cross purposes with the central bank's efforts to bring inflation down.

🚨Breaking News🚨 Bank of Canada Governor confirms at finance committee that the carbon tax is inflationary. Axing the tax like common sense Conservative are calling for would make a huge dent in inflation which could bring down interest rates sooner. pic.twitter.com/cEGDfFYjVT

— Jasraj Singh Hallan 🇨🇦 (@jasrajshallan) October 30, 2023

The governor says that according to federal and provincial budgets, government spending aggregate will grow faster than supply in the economy over the next year, adding upward pressure to inflation. 

"It would be helpful if monetary and fiscal policy was rowing in the same direction," Macklem said. 

At the same time, the governor said it's important to compare Canada's fiscal stance to other countries. 

"You have to compare Canada to other countries. Canada's deficit-to-GDP ratio is the lowest in the G7," Macklem said. 

The initial run-up in prices during 2022 was largely attributed to global circumstances, including supply chain disruptions and the Russian invasion of Ukraine.

Government spending, however, has also been scrutinized as the central bank has pointed to domestic inflationary pressures as well. 

Since March 2022, the Bank of Canada has rapidly hiked rates to clamp down on spending and bring down inflation. 

As the economy bends under the weight of higher borrowing costs, the Bank of Canada opted to maintain its key interest rate at five per cent last week, but left the door open to more rate hikes if inflation remains high. 

The Bank of Canada is expecting the country's annual inflation rate, which came in at 3.8 per cent in September, to return to two per cent in 2025.