Ottawa’s 2023 budget will be closely watched by the Bank of Canada. Why?

Click to play video: 'Canadian banks are stable, but ‘something is going to break’ in economy: experts'
Canadian banks are stable, but ‘something is going to break’ in economy: experts
Canadians may have had flashbacks to the 2008 financial crisis last week when it looked like the collapse of Silicon Valley Bank was spreading before Washington stepped in. The bank turmoil adds to the economic uncertainty caused by inflation, rising food and gas prices and high interest rates. Ahead of the federal budget announcement on March 28, "The West Block" host Mercedes Stephenson speaks with Kevin Page, former Parliamentary Budget Officer and head of the Institute of Fiscal Studies and Democracy, and Lisa Raitt, former Conservative cabinet minister and vice chair of global investment banking at CIBC, about the state of Canada’s economy. – Mar 19, 2023

Bank of Canada policymakers cited higher than expected government spending as a risk to its inflation outlook in deciding where to take its key interest rate in its last decision.

The central bank governing council’s deliberations for its March 8 interest rate announcement, where the Bank held its key rate at 4.5 per cent, were published Wednesday, a week ahead of the federal Liberals’ 2023 budget release.

Among the topics the council discussed before arriving at the decision to hold its policy rate steady and let its rapid rate hikes take hold in the economy was “stronger than expected” government spending in the fourth quarter of 2022.

According to the deliberations, Bank of Canada policymakers discussed how sustained growth in government spending that outpaces economic growth would “boost domestic demand,” a key input driving inflation.

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Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, said in a note to clients Wednesday that the mention in the deliberations was “perhaps a very modest nod to the government that further stimulus would be counter to the BoC’s goal.”

In appearances before the House of Commons’ finance committee, Band of Canada Governor Tiff Macklem has stopped short of commenting directly on government spending plans.

Responding to questions from committee members last month, Macklem reinforced the central bank’s independent role to lead Canada’s monetary policy and said he would leave fiscal policy decisions to members of Parliament.

Any government spending plans would be factored into the Bank of Canada’s inflation forecasts, he added. According to the deliberations released Wednesday, the central bank will include details from the 2023 budget in its next monetary policy report, set for release on April 12 alongside another rate decision.

Finance Minister Chrystia Freeland said Monday that the government is not looking to “pour fuel on the fire of inflation” and complicate the Bank of Canada’s efforts to restore price stability.

Freeland also said that the government will provide “targeted” inflation relief to vulnerable Canadians.

Click to play video: '‘Targeted’ inflation relief for vulnerable Canadians coming in 2023 budget: Freeland'
‘Targeted’ inflation relief for vulnerable Canadians coming in 2023 budget: Freeland

Strong economy, tight labour market are still inflation risks: BoC

The Bank of Canada meanwhile is still concerned inflation might be harder to bring down than expected, noting in the deliberations the economy is still in excess demand.

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The members of the governing council were encouraged to see the economy and inflation both slowing, supporting their decision to hold the key interest rate.

However, the governing council remained concerned about the risk of inflation getting stuck above two per cent and agreed that supply was still outstripping demand in the economy.

In the fourth quarter, the Canadian economy posted no growth as the accumulation of business inventories slowed.

“With inventories adjusting earlier than anticipated, governing council concluded that growth in early 2023 may be a bit stronger than the bank had forecast,” the summary said.

Economists widely expect the central bank to continue holding its key interest rate steady on April 12.

The latest consumer price index report showed inflation slowed further in February, with the annual rate falling to 5.2 per cent.

However, an ongoing concern for the Bank of Canada is the tight labour market and strong wage growth.

The unemployment rate continues to hover near record lows, while average hourly wages have been increasing at an annual rate of four to five per cent.

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The Bank of Canada notes in its summary of deliberations that the governing council continues to believe that the pace of wage growth will make it harder to get inflation back to its two per cent target, given wage growth isn’t accompanied with productivity growth.

— with files from The Canadian Press

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BIV: Canada’s inflation rate cools to 5.2%

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