Governments shunting 'dirty work' on inflation to Bank of Canada, CIBC says

The Bank of Canada will have to keep rates higher for longer unless governments do more to dial back their spending, one of the country’s largest commercial lenders warned.

Economists at Canadian Imperial Bank of Commerce say policymakers led by Governor Tiff Macklem have been left to do the “dirty work” of stalling the economy in order to bring inflation back to the 2 per cent target. And while they acknowledge that lower federal fiscal spending has started to drag on growth as generous Covid-19 programs expire, they argue that cutting back further on state largesse would help to cool demand.

“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,” CIBC economists Avery Shenfeld and Andrew Grantham said Monday in a report. “It’s not too late to consider a fiscal policy shift.”

CIBC’s comments come a week after Macklem was forced to restart his hiking campaign in an attempt to blunt the country’s surprising economic momentum. The unexpected move — which saw benchmark borrowing costs rise to 4.75 per cent, the highest since 2001 — has raised questions about whether the central bank’s task of cooling price pressures is being complicated by government transfers as some Canadians brush off higher rates and keep consuming.