Bank of Canada Says Federal Budget Could Hinder Inflation Fight

• On Thursday, Bank of Canada (BoC) Governor Tiff Macklem said Prime Minister Justin Trudeau should avoid major spending increases in his next federal budget so they do not hinder the central bank's efforts to bring down stubborn inflation.
• "If there are large spending increases, that could start getting in the way of getting inflation back down to target on the timeline we've laid out," Macklem said in testimony to the House of Commons finance committee. Macklem was responding to a question by a lawmaker about the federal government's upcoming budget, which is due to be released in March or April.
• Overall, government spending at federal, provincial, and municipal levels is now increasing about 2.25% annually, which is not helping bring down inflation. However, if spending in the federal budget stimulates demand, it would be "particularly problematic," he said.
• During the pandemic, the country's budget deficit ballooned to historic highs, and the opposition has repeatedly criticized the Trudeau government for fueling inflation with its spending. The BOC has held its key overnight rate at a 22-year high of 5.0% to tame inflation, even as GDP growth has been lacklustre and inflation has remained well above its 2.0% target. Inflation was 3.4% in December.
• The governor said unexpected developments, such as a sudden supply chain blockage, could still force the central bank to raise interest rates again even though now it is more focused on when it should start to lower them.

(Source: Reuters)