(Bloomberg) – One of Canada’s largest commercial banks fired on Prime Minister Justin Trudeau’s government, warning that high levels of federal spending are hurting the fight against inflation.
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Bank of Nova Scotia economists, in an investor report released Sunday evening, said aggressive interest rate hikes by Bank of Canada Governor Tiff Macklem would unduly punish companies, given the levels still high fiscal stimulus.
“Production losses the BdC has to manage to curb inflation are falling disproportionately on the private sector,” said Scotiabank chief economist Jean-Francois Perrault and Rene Lalonde, forecast director. of the bank.
“Indeed, high levels of fiscal spending will require an unnecessarily large shift in private spending,” they said. “Less government consumption would lead to a lower path for the policy rate and remove some of the burden of the adjustment on the private sector.”
Scotiabank’s criticism comes after a speech by Finance Minister Chrystia Freeland last week on the government’s plan to tackle inflation. His remarks on Thursday highlighted the central bank’s key role in the fight to reduce price gains and its decision not to spend unexpected revenue on new programs in this year’s budget. But he did not announce any change in policy.
May consumer price data is expected to show annual gains of more than 7%, the highest in nearly 40 years. In his speech last week, Freeland said that inflation “is a global phenomenon, driven by factors for which no country is responsible.”
Like other governments around the world, the Trudeau administration spent a lot of money when Covid-19 shut down large parts of the economy: program spending rose sharply to nearly 30% of gross domestic product. In the April budget, the Freeland department predicted spending that would remain close to 16% of GDP over the next year, above the historical average before the pandemic.
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Perrault and Lalonde argue that if the government withdrew spending, it would allow the Bank of Canada to “end its hardening cycle at a political rate of 2.25%.”
With inflation still rising, Macklem and his officials are expected to follow the Federal Reserve and provide a 75 basis point rise in loan costs on July 13th. This would bring the one-day reference rate to 2.25%, more than the 0.25 emergency minimum. % remained until March.
Overnight swap market action suggests traders will see Canada’s central bank rate at 3.75% at this time next year.
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