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Canada's profligate spending forced interest rates higher: Scotiabank

11/20/2023 | Posted in Canadian Economy and Interest Rates by Paul DeAdder | Back to Main Blog Page

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Monetary policy in Canada wouldn’t be as restrictive if elected officials had restrained their spending in recent years, according to economists at the Bank of Nova Scotia.

Roughly 200 basis points of interest rate tightening stems from the combined program spending and consumption by Canada’s federal and provincial governments since the pandemic, Scotiabank economists Jean-François Perrault and Rene Lalonde wrote in a report to investors. 

Without that boost in spending, the central bank’s key overnight lending rate would be about 3 per cent instead of the current 5 per cent, according to their calculations. 

“There is no question in our minds that fiscal policy has complicated the task of monetary policy,” they wrote on Friday. “Interest rates are substantially higher than they would be had government consumption spending at all levels of government remained fixed in relation to GDP.”

The report is the latest criticism from economists who say Canada’s federal and provincial governments are making the central bank’s job harder than it needs to be. Last month, Bank of Canada Governor Tiff Macklem told elected officials that they should consider the inflationary consequences of their fiscal plans as they craft their budgets, adding that it would be easier for him to bring price pressures to heel if fiscal and monetary policy were “rowing in the same direction.”

Finance Minister Chrystia Freeland is set to deliver a fiscal statement on Tuesday, and Ontario, the largest province, provided a financial outlook earlier this month that included elevated spending levels. Unlike the provincial governments, Canada’s federal lawmakers also have a “joint responsibility” for achieving the 2 per cent inflation target, according to the Bank’s most recent mandate.

“Our results suggest that fiscal policy was badly mis-calibrated since the pandemic from an inflation-management perspective,” Perrault and Lalonde wrote. “All levels of government are responsible for this.”

Source: BNN Bloomberg

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