Bank of Canada Warns High Rates and Slow Growth Will Affect Government Spending, According to Reuters

OTTAWA (Reuters) – The Bank of Canada announced on Monday that rising interest rates and sluggish economic growth will affect the federal government’s budgetary spending. While the country’s fiscal position remains sustainable, it is crucial to manage expenditures carefully to safeguard social programs.

Governor Tiff Macklem addressed lawmakers in the House of Commons, stating, "Lower growth and higher interest rates will certainly impact the government’s budget." He emphasized the importance of maintaining the country’s solid fiscal standing for the benefit of social programs and overall prosperity.

Macklem pointed out that Canada possesses the lowest debt-to-GDP ratio among the Group of Seven industrialized nations.

Finance Minister Chrystia Freeland is expected to unveil the government’s Fall Economic Statement soon, which will provide updates on fiscal and economic forecasts, with potential new spending initiatives to address the housing crisis and cost-of-living challenges, all while ensuring fiscal responsibility.

Macklem reiterated a message from the previous week, when the central bank opted to keep its key overnight rate steady at a two-decade high of 5%. He explained, "We held our policy rate steady (last week) because monetary policy is working to cool the economy and alleviate price pressures, and we want to give it time to do its job."

The central bank will continue to evaluate whether monetary policy is effectively restrictive enough to restore price stability and will closely monitor emerging risks.

Furthermore, the bank noted that inflation risks are increasing, suggesting that inflation may exceed its 2% target for at least another two years.

The central bank has raised interest rates ten times between March 2022 and July 2023 in efforts to combat inflation, which peaked at a 40-year high of 8.1% last year. Although inflation decreased to 3.8% in September, it still remains significantly above the Bank of Canada’s 2% target.

Macklem concluded, "We have made a lot of progress in reducing inflation, but we are not there yet, and we need to stay the course."