The Bank of Canada has essentially been left on its own in the "dirty work" of bringing down inflation levels
The Bank of Canada has essentially been left on its own in moderating inflation levels, and governments need to step up as well if economic conditions are to remain sustainable in the long run, according to the Canadian Imperial Bank of Commerce (CIBC).
Entrusting the “dirty work” of bringing down inflation solely to the central bank is proving to be a less than optimal approach, CIBC economists Avery Shenfeld and Andrew Grantham said in a new report.
“If the job of engineering that slowdown is left only to the Bank of Canada, monetary policy will have to squeeze on growth for a longer period than we previously thought, given that the labour market hasn’t opened up much slack thus far,” the economists wrote. “It’s not too late to consider a fiscal policy shift.”
CIBC said that while fiscal policy is not “significantly fuelling” existing inflation levels “it would be even better if, at least in the near term, it was actually putting some downward pressure on inflation by helping to cool off the fire.”
The economists called on governments and policy makers to be more circumspect in their fiscal approach over the next few months.
“At a minimum, this isn’t the year for finance ministers who find a bit more money in their coffers at mid-year to look for new ways to spend it or dole it out to households,” Shenfeld and Grantham said.
Taking current indicators into account, CIBC is anticipating a follow-up hike of 25 basis points soon.
“We’ve pushed back the timing of the first interest rate cut to June of next year,” the CIBC analysts said. “Even by the end of next year, overnight rates will likely still be well above the 2.5% level seen as neutral.”
