Lifting pandemic stimulus earlier would have contained inflation: Bank of Canada’s Macklem – National

The Bank of Canada and the federal government could have taken their foot off the gas earlier in stimulating the economy during the COVID-19 pandemic, Governor Tiff Macklem said Wednesday, but he added that the knowledge is only now clear with the benefit of hindsight.

Macklem and Senior Deputy Governor Carolyn Rogers spoke to the House of Commons Standing Committee on Finance on Wednesday night, where they were called upon by MPs to discuss the impact of higher interest rates on Canadians’ finances and the effects of the central bank’s monetary policy decisions on inflation.

The bank’s benchmark interest rate has risen 3.5 percentage points since March in a bid to curb the rising cost of living, but Macklem said on Wednesday that the Bank of Canada is “still far from its goal” of ensuring “low , stable, predictable” inflation.

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Annual inflation rate across Canada held steady at 6.9 percent in October – down from June’s peak of 8.1 percent, but still well above the central bank’s target of 2 percent.

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“This tightening phase will come to an end. We’re getting closer, but we’re not there yet,” said Macklem.

The US Federal Reserve, the Bank of Canada’s counterpart south of the border, has also suggested that the pace of rate hikes could slow rapidly, according to recently published minutes of its meetings in early November.

But Macklem conceded on Wednesday that inflation, while initially a globally driven phenomenon with supply chain problems and the war in Ukraine, might not have gotten so bad if the central bank had stopped stimulating inflation earlier during the COVID-19 pandemic. economy.

Between 2020 and 2021, interest rates were at a low 0.25 percent and the bank engaged in quantitative easing by adding more bonds to its balance sheet to further lower interest rates and stimulate the economy. Macklem noted that this practice ended more than a year ago and the bank has since begun quantitative tightening by letting its existing bonds mature.

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But in response to questions from Conservative Party MPs Marty Morantz and Andrew Scheer, Macklem acknowledged that boosting monetary policy could have been lifted sooner.

“If we knew a year ago everything we know today, yes, I think we should have started lowering interest rates sooner to withdraw stimulus,” he said, adding that stimulus was “a major factor that made for a very strong recovery”.

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Bank of Canada senior vice governor Paul Beaudry also said in a speech in September that lifting global stimulus sooner could have contained inflation.

Macklem did not ultimately label the Bank of Canada’s monetary policy response to the pandemic a failure on Wednesday. Instead, he called for a review of the bank’s own response to the economic uncertainty and how effective its tools were in mitigating the impact and recovery from the pandemic.

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“If we all bring inflation down to two (percent), I think we need to take a thorough look at how all of our tools have weathered this pandemic,” he said.

“I’m not saying we got everything right. We didn’t do everything right. I think we did a lot of things right and we have some lessons to learn.”

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Government spending must be targeted, temporarily: Macklem

Morantz also asked Macklem whether inflation would have eased if there had been less stimulus from federal government spending during the pandemic.

“For example, if deficit spending had been half that — $250 billion instead of $500 billion — would inflation have been lower?” asked Morantz.

“There would have been less stimulus in the economy, there would have been less demand, it (inflation) would have been less,” Macklem replied.

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Governments that want to ease inflation for Canadians should choose measures that are well-targeted and temporary, he added.

Conservative MP Adam Chambers asked the governor which of two options is a better way to deliver aid without fueling inflation: direct transfers to low-income Canadians or energy aid packages.

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In response, the governor said that targeted and temporary measures fuel inflation less than broadly supported measures.

“Policies aimed at mitigating the effects of inflation on citizens really need to be targeted, targeting the most vulnerable, and temporarily, temporarily while this is an inflation problem,” Macklem said.

The federal government, along with provincial governments, has responded to high inflation with measures to soften the financial blow to Canadians. While some measures targeted lower incomes, others were widely supported.

The federal government recently temporarily doubled the GST rebate, a benefit that goes to low- and modest-income Canadians.

Counties have also provided assistance, with some opting to send out checks more widely.

Most recently, Alberta Premier Danielle Smith announced a slew of inflation measures on Tuesday, including payments of $600 per child for families earning less than $180,000 a year. The same income limit and benefits apply to seniors.

– with files from The Canadian Press

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