At the same time, the federal government should step up in helping the BoC manage the crisis
The Bank of Canada’s aggressive interest rate hike trajectory is “unduly punishing” the nation’s businesses, according to economists at Bank of Nova Scotia.
“While normalization of monetary policy will, in time, reduce inflationary pressures in Canada and elsewhere, the Bank of Canada is also fighting the lagged and ongoing impact of fiscal support measures,” Scotiabank chief economist Jean-Francois Perrault and director of forecasting Rene Lalonde said in a new report to investors.
Thus, “the output losses that the BoC must engineer to rein in inflation are falling disproportionately on the private sector,” they added.
Following the central bank’s two outsized 0.5% hikes this year, a larger 0.75% increase in the BoC’s next policy meeting is not out of the realm of possibility. Governor Tiff Macklem has already indicated that the central bank is ready and willing to act “more forcefully.”
Fuelling the possibility is the United States Federal Reserve’s 0.75% rate hike last week, which was its largest in 28 years. Canadian observers said that this has raised the odds of the BoC making a similar move.
Read more: What will influence the Bank of Canada’s next rate decision?
At the same time, Perrault and Lalonde called on the federal government to help the central bank establish a more reasonable approach that will not unnecessarily burden one sector over all others.
“In effect, high levels of fiscal spending will necessitate an unnecessarily large crowding out of private spending,” the duo said. “Less government consumption would lead to a lower path for the policy rate and take some of the burden of adjustment away from the private sector.”
The economists stressed that achieving the 2% inflation target is a “joint responsibility” between the government and the BoC.
“At present, the Bank of Canada is shouldering the burden of reducing exceptionally high inflation on its own even though it is clear that much of the increase in inflation since the pandemic stems from fiscal policies in Canada (and elsewhere) that were designed to protect firms and households from the economic impacts of the pandemic,” they said. “It is fair to say that fiscal policy authorities in Canada are doing nothing of any significance to slow inflation at the moment.”
