Canada govt spending to feed inflation next year, central banker says

Bank of Canada Governor Tiff Macklem takes part in a press conference in Ottawa

By Steve Scherer and Ismail Shakil

OTTAWA (Reuters) - Spending by federal and provincial governments in Canada will start feeding into inflation next year if current spending plans are maintained, Bank of Canada (BoC) Governor Tiff Macklem said on Wednesday.

If governments follow through with spending plans for 2024, it would mean "government spending is starting to get in the way of getting inflation back to target" of 2%, Macklem told members of a Senate committee.

Inflation was clocked at 3.8% in September, but the BoC said last week it may not come down to target until the second half of 2025.

"We have built that into our forecast. We do get back to target but it takes some time," he added. If governments spend less, "it would be easier to reduce inflation," Macklem said.

The federal government's Fall Economic Statement (FES) could come as early as next week. The FES updates fiscal and economic forecasts, but it also often includes new spending plans.

It looks like there could be more federal spending on the way because Finance Minister Chrystia Freeland has said she will unveil measures in the FES to help Canadians tackle housing and affordability.

As Canada grapples with a possible recession and its highest debt costs in more than two decades, economists say Prime Minister Justin Trudeau should curb spending to ensure future policy choices are not forced on him.

BoC Senior Deputy Governor Carolyn Rogers told the Senate committee about 40% of households had already renewed mortgages at a higher rate after the bank hiked rates to a 22-year high of 5.0% between March of last year and July 2023.

"Certainly there's pressure (on households), and we wouldn't want to minimize it, but we're not seeing anything in the data that would suggest that households are under a significant increased amount of stress" from mortgages, Rogers said.

(Reporting by Ismail Shakil and Steve Scherer in Ottawa; Editing by David Gregorio)