Despite Chrystia Freeland, Canada’s finance minister, promising not to make the task of monetary policy tougher, analysts said the country’s plan to spend an additional 6.1 billion Canadian dollars ($4.5 billion) over the course of the next five months may weaken the central bank’s efforts to contain inflation.
The spending plan, which Freeland outlined in a fiscal report on Thursday and builds on already-existing federal stimulus measures and consumer payouts pledged by Canada’s ten provinces, is relatively modest in scope but has sparked fears about further igniting an already-hot economy.
After the government revealed a massive increase in jobs in October, scrutiny increased on Friday, increasing the likelihood that the Bank of Canada would have to raise interest rates for the sixth consecutive meeting next month.
Commenting on the latest development, Derek Holt, vice president of capital markets economics at Scotiabank, noted:
“I would have rather seen them totally toeing the line on spending, if not shrink it somewhat so that maybe we would have less by way of cumulative rate hikes going forward.”
Holt stated that instead, “the onus is still squarely, fully, 100% on the Bank of Canada to tighten.”
Bank of Canada’s Interest Rate to Increase by 0.5% In December
The BoC is expected to increase its policy rate by half a percentage point on December 7 in addition to the 350 basis point tightening it has already implemented since March, according to the money markets. Early in 2023, 4.5% is predicted to be the policy rate of the BoC.
Freeland’s growth forecast may also prove to be more optimistic than necessary if interest rates rise more than initially anticipated and continue to rise. If this happens, the Liberal government’s reliance on a tax revenue windfall to fund spending and reduce the deficit from 3.6% of GDP last fiscal year to 1.3%-1.8% this fiscal year may be in jeopardy.
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