Bank of Canada’s Macklem says fiscal policy is not at odds with the inflation fight and pledges care on further hikes

Bank of Canada Governor Tiff Macklem told members of Parliament that he does not think the federal government’s fiscal policy is at odds with the central bank’s efforts⁸. He said Prime Minister Mark Carney’s fiscal plans are not yet making it harder for the bank to control inflation^2,7.

Macklem appeared before the House of Commons finance committee⁴. He defended last week’s decision to raise interest rates to 2.5%, saying officials needed to address a buildup of cost pressures and expectations that a larger share of firms would raise their prices over the next 12 months¹. He pledged to proceed carefully on further rate increases^1,3.

The governor also warned that the bank can no longer look through the energy price shock⁴.

Why it matters to investors

The bank raised its key rate by a quarter-point to 2.5 per cent last week, reflecting worries about inflation pressures⁵. It was the first increase in three years⁶. In his testimony to the finance committee, Macklem set out how the bank weighs further moves^1,4.

Two messages pull in different directions. On one side, Macklem said the bank needed to respond to rising cost pressures and to firms’ plans to raise prices¹, and that it can no longer treat the energy shock as temporary⁴. On the other, he promised to move carefully on any further increases^1,3.

His view on fiscal policy matters for the bond market. By saying Carney’s plans are not yet making the bank’s job harder², Macklem signalled that the bank does not see government spending as a reason in itself for higher rates. The word “yet” leaves room for that view to change².

What to watch

The next event is the federal budget. The Bank of Canada is standing by last week’s hike as Ottawa prepares to table its budget on 5 November⁶. Observers will be watching whether the spending plans in that budget test Macklem’s view that fiscal and monetary policy are not at odds^5,8.

Investors will also watch the bank’s reading of firms’ price expectations, which Macklem cited as a reason for the hike¹, and the path of energy prices, which he said the bank can no longer look through⁴.

Macklem’s pledge to proceed carefully³ suggests the bank will weigh each further increase against incoming data rather than commit to a set path¹.