Feds are ‘doing nothing of any significance to slow inflation’: Scotiabank

One of Canada's biggest banks believes the Bank of Canada might not need to raise interest rates as high if the federal government limits its spending plans.

A cut in planned government spending could help tame rampant inflation and reduce pressure on the Bank of Canada to hike interest rates, according to a report from Scotiabank.

The report from the bank’s chief economist Jean-Francois Perrault and modelling director René Lalonde claims that Canadian fiscal policymakers are “doing nothing of any significance to slow inflation at the moment.”

The authors argue that cutting government spending will take some of the burden to cool inflation off of the Bank of Canada and the private sector.

Scotiabank’s analysis comes as Canada’s Deputy Prime Minister and Minister of Finance Chrystia Freeland is set to meet with the head of the U.S. Treasury Janet Yellen in Toronto on Monday to discuss cooperation between the nations and the global inflation concerns.

The report cites the Bank of Canada’s renewed mandate from December of last year, which said tackling inflation is a “joint responsibility” between the feds and the central bank.

While the war in Ukraine and ongoing supply chain pains tied to the COVID-19 recovery have been cited as major causes of higher-than-expected inflation so far in 2022, Perrault told Global News in an interview Monday that prices were on the rise before Russia’s invasion.

That was tied to stimulating fiscal policies from governments around the world, which sought to protect households from the pandemic’s downturns, he said.

Though he said efforts to trim the government’s deficit in the spring’s federal budget were “going in the right direction,” Perrault said the latest Liberal spending plan is still contributing to the economy and fuelling demand.