Most read from Bloomberg Bank of Nova Scotia economists said in a report to investors released Sunday night that aggressive interest rate hikes launched by Bank of Canada Governor Tiff Macklem would unjustifiably penalize businesses, given the still high levels of fiscal toning. “The production losses that the BoC must plan to curb inflation are disproportionately reduced in the private sector,” said a report by Scotiabank chief economist Jean-Francois Perrault and Rene Lalonde, the bank’s forecast manager. “In fact, high levels of fiscal spending will require an unnecessarily large marginalization of private spending,” they said. “Less government consumption would lead to a lower policy rate and remove some of the burden of adjustment from the private sector.” Scotiabank’s criticism comes after Finance Minister Chrystia Freeland spoke last week about the government’s plan to tackle inflation. Her comments on Thursday highlighted the central bank’s leading role in the fight to cut profits and its decision not to spend unexpected revenue on new programs in this year’s budget. However, he did not announce any change in policy. Consumer price data for May is expected to show annual profits of more than 7% – the highest in almost 40 years. In a speech last week, Freeland said inflation “is a global phenomenon – due to factors for which no country is responsible.” Like other governments around the world, the Trinto government spent a lot when Covid-19 shut down large parts of the economy: Program spending rose by almost 30% of gross domestic product. In the April budget, the Freeland Division projected spending to remain close to 16% of GDP next year, higher than the pre-pandemic historical average. The story goes on Perrault and Lalonde argue that if the government withdraws from spending, it would allow the Bank of Canada “to end the tightening cycle with a policy rate of 2.25%. As inflation continues to rise, Macklem and his officials are expected to follow the US Federal Reserve and raise 75 basis points on borrowing costs on July 13. This will bring the overnight reference rate to 2.25%, from the low of 0.25% it maintained until March. The overnight trading activity indicates that traders see the Bank of Canada’s interest rate at 3.75% at this time next year. Most read by Bloomberg Businessweek © 2022 Bloomberg LP
