Prime Minister Justin Trudeau risks fueling Canada’s heated inflation further if he goes ahead with the spending plans outlined during the election campaign, which could pressure the Bank of Canada to raise interest rates sooner than planned. Is.
Trudeau’s Liberals have promised $78 billion in new spending over five years, which is about 4 percent of GDP. This would be in addition to additional spending of $101 billion over three years passed in a budget earlier this year.
Provisional election results show the Liberals are coming to terms with another minority government, again forcing them to work with opposition legislators such as the left-leaning New Democratic Party, which has its own spending priorities.
Tony Stillo, Canada’s director of economics at Oxford Economics, said: “When you start to see stimulus like this impacting the economy … we think it could prompt the Bank of Canada to respond.” “
“We think the slowdown in the economy can be quickly absorbed by the start of next year.”
Currency markets have in recent weeks raised prices by an additional 14 basis points by the central bank in the coming year, with rates expected to be hiked as soon as next July.
The BOC declined to comment.
Additional spending can add to inflationary pressures by easing the slowdown in the economy. In August, Canada’s annual inflation rate hit its highest level in 18 years at 4.1 percent, well above the Bank of Canada’s 1 percent-3 percent target range.
The central bank is cutting its bond buying program but is waiting for the economic slowdown to turn around before considering raising interest rates to a record low of 0.25 per cent. Its latest forecast will see a return to full capacity in the second half of 2022.
on the supply side
Trudeau repeatedly touted questions about the inflationary impact of his spending plans, saying his focus was on helping Canadian families and those grappling with the pandemic. At the start of the campaign, he told reporters, “You’ll forgive me if I don’t think about monetary policy.”
But evidence that supply chain constraints and labor shortages are driving inflation may indicate that additional stimulus is not what the economy needs right now.
Doug Porter, chief economist at BMO Capital Markets, said the economy is constrained by supply-side issues rather than very little demand. With additional fiscal spending, inflation risks are “tilted on the higher side.”
Canada’s economy is expected to rebound after unexpectedly shrinking in the second quarter and employment climbed to within 1 percent of pre-pandemic levels.
“The economy is back, employment is back,” said Pedro Antunes, chief economist of the Canadian Conference Board. “There’s a lot of savings with these aid programs and there’s a lot of gain in the economy right now.”
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