Federal Government’s New Fiscal Guardrails ‘Helpful’ for Monetary Policy: Bank of Canada Governor
Bank of Canada Governor Tiff Macklem has praised the federal government’s new fiscal guardrails, stating that they will be beneficial for monetary policy. Macklem provided his insights during a news conference on Wednesday, where he discussed the government’s fiscal projections and the newly implemented rules aimed at limiting deficits.
Macklem expressed his satisfaction with the fall economic statement, stating that it suggests the government will not contribute to additional inflationary pressures in the coming years. He emphasized the criticality of this period as the central bank aims to reduce inflation and bring it back to the target level. Furthermore, Macklem acknowledged the inclusion of new fiscal guardrails beyond the near term, underscoring their helpfulness for monetary policy.
One of the commitments outlined in the fall economic statement is the government’s goal to keep deficits below one percent of the Gross Domestic Product (GDP) starting from 2026-27. Additionally, the Liberals aim to maintain the deficit for the current fiscal year at or below the spring budget projection of $40.1 billion. They also intend to lower the debt-to-GDP ratio in 2024-25, relative to the projection provided in the fall economic statement.
Earlier in the day, Macklem delivered a speech to the Saint John Region Chamber of Commerce, where he cautioned against fighting inflation half-heartedly and living with its consequences. He highlighted the potential consequences of such an approach and emphasized the importance of addressing inflation adequately.
During his speech, the governor drew a parallel between the current fight against inflation and the inflation experienced in the 1970s. He discussed the similarities and differences between the two periods, highlighting the negative impact of insufficient measures taken during the 1970s to combat inflation. He emphasized that policymakers were not determined enough to restrain government spending and tighten monetary policy. As a result, Canadians lived with high inflation for over a decade.
Macklem stressed the importance of fully committing to the fight against inflation in the present, emphasizing the need to avoid the stress, labor strife, and uncertainty it can cause. The Bank of Canada has already responded to rising inflation by raising interest rates aggressively since March 2022. While the bank has maintained its key interest rate at five percent in its recent decision meetings due to halted economic growth, Macklem stated that they are prepared to raise rates further if high inflation persists.
Macklem acknowledged two advantages that Canada has today compared to the 1970s. Firstly, people expect inflation to decrease in the long run, and secondly, the Bank of Canada has responded forcefully through aggressive rate hikes. He acknowledged that the interest rate hikes may feel like an additional cost for many Canadians but assured them that the rates are relieving price pressures throughout the economy. Macklem reiterated the importance of staying the course in order to reap the benefits in the future.
As the Bank of Canada continues to address inflation and monetary policy, Macklem’s insights and assessment of the federal government’s fiscal guardrails provide valuable information on their impact on monetary policy. With the government’s commitment to limiting deficits and reducing the debt-to-GDP ratio, it is expected that these measures will contribute to the overall stability of the economy and assist in achieving the target inflation rate.
In conclusion, Macklem’s comments shed light on the close coordination between fiscal and monetary policies, emphasizing the importance of a comprehensive approach to ensure economic stability. The Bank of Canada’s readiness to take necessary measures indicates a proactive stance in addressing inflation and maintaining overall economic health.
