Bank of Canada governor says federal spending not at odds with inflation fight

OTTAWA · Bank of Canada governor Tiff Macklem told a House of Commons committee on Tuesday that the government's current fiscal policy is not undermining the central bank's work to control inflation. He and senior deputy governor Carolyn Rogers appeared before the finance committee two days before the 2026 federal budget is tabled. Macklem said he typically refrains from commenting on fiscal matters unless spending nears unsustainable levels or directly conflicts with inflation targets. "In the current circumstances, I don't think either of those criteria are met," he told MPs. The central bank raised its key interest rate to 2.5 per cent last week due to concerns about inflation pressures stemming from the war in the Middle East.

Macklem identified the global energy shock from that conflict as the primary driver of inflation in Canada. When asked directly if government spending was adding to price pressures, he pointed to the state of the economy. He explained that Canada's economy is in a condition of excess supply, where production outpaces consumer demand. In such an environment, federal spending that adds to demand, like transfers to individuals, is not expected to significantly fuel inflation. Productive investments that boost long-term supply can actually help the economy grow without stoking price increases, he added.

How do economists view the impact of deficits?

Desjardins deputy chief economist Randall Bartlett said federal deficits have only a minimal effect on the inflation outlook. "Federal deficits do support higher inflation than would be otherwise the case, but only to a very, very minor degree," Bartlett said in an interview following last week's rate decision. He stated his firm's view that federal government deficits are not currently inflationary. This analysis contrasts with the political criticism levelled by the Conservative opposition, which has repeatedly blamed government spending for rising costs.

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The Conservative Party, in a press release issued Tuesday, attributed struggles with affordability directly to Liberal policies and the fiscal agenda of Prime Minister Mark Carney. The release claimed Carney is "spending more on almost everything, passing costs on to Canadians through higher inflation and interest rates." Conservative Leader Pierre Poilievre has consistently criticized what he labels inflationary spending and called for cuts before Thursday's budget. The party is also urging a temporary suspension of federal fuel taxes and levies until summer to provide cost-of-living relief.

What did Macklem say about spending three years ago?

Macklem's current stance differs from comments he made three years prior, when he warned that the pace of government spending was problematic. At that time, he said spending was increasing demand faster than supply, a trend he described as "not helpful" for bringing inflation under control. The Liberal government under Prime Minister Carney has since projected deeper deficits as part of an economic strategy to reduce reliance on the United States. The Bank of Canada operates independently from the government, with its main tool being the setting of the benchmark interest rate.

What is the central bank's view on productivity?

Many committee questions focused on productivity, following a 2024 speech in which senior deputy governor Carolyn Rogers declared a national productivity emergency. Rogers told MPs that stronger productivity leads to higher wages and a better standard of living. She said a more productive economy can better absorb shocks without triggering inflation or rate hikes. While productivity has not surged since her warning, Rogers said the bank sees "some promising indicators." She noted business investment is beginning to rise, though she cautioned that translating that into measurable productivity gains will take time.

With files from The Canadian Press, BNN Bloomberg and CP24