Home Economy Mark Carney says fiscal discipline ‘imperative’ to fight inflation

Mark Carney says fiscal discipline ‘imperative’ to fight inflation

by Stephanie Hughes

Argues it’s time to reduce pandemic support-driven deficits

Article content

Former Bank of Canada governor Mark Carney said prudent fiscal policy will be “imperative” to combatting global inflationary pressures and financial instability. The former central banker also argued it was the time to reduce pandemic support-driven deficits.

Advertisement 2

Article content

“In an environment where we have left the world of low-for-long interest rates (and) low volatility, in an environment where borrowing costs are going to be higher — in my judgment, higher not just in the short-term, but in the medium-term — fiscal discipline is imperative,” Carney said during testimony at the Senate banking committee on Oct. 20.

Article content

Article content

Carney, now vice chair and head of transition investing at Brookfield Asset Management Inc., pointed to the drama unfolding in the United Kingdom as a cautionary tale for governments who fail to take fiscal policy seriously.

A few hours earlier, British Prime Minister Liz Truss had resigned, ending a tumultuous 44-day run as leader of the governing Conservative party. Truss had defied convention by pitching an aggressive bundle of tax cuts without explaining how her government would pay for them. Bond yields spiked, unsettling financial markets so much that the Bank of England was forced to buy debt in order to calm the waters, even though it had been trying to reduce monetary stimulus in order to counter double-digit inflation.

Advertisement 3

Article content

“One of the lessons is that sound money credible fiscal policies will be rewarded, but mistakes will be punished,” said Carney, who led the British central bank between 2013 and 2020. “The U.K. experience underscores that it’s counterproductive for fiscal and monetary policies to work at cross purposes. Colloquially, as the one foot is on the brake, and that’s with monetary policy, it’s foolish to put the other to stomp on the gas.”

Carney said Canadian governments should take heed. He said targeted aid to households most affected by inflation was justifiable, but that otherwise it’s time to reduce deficits. With the benefit of hindsight, Carney also made the point that federal fiscal supports that were necessary through much of the pandemic went on longer than warranted.

Advertisement 4

Article content

“There was a period of time where fiscal policy was reinforcing some of the challenges that the Bank of Canada began to see,” Carney said, referring to a surprisingly rapid surge in inflation over the second half of last year.

The Bank of Canada is now rushing to contain the fastest inflation in four decades, raising interest rates so fast that policymakers risk triggering a downturn. Governor Tiff Macklem has increased the benchmark rate by three percentage points since March and has made clear he isn’t finished. The central bank is expected to deliver another outsized rate hike of 50 or 75 basis points next week during the Oct. 26 rate decision.

  1. None

    Inflation is slowing, but not enough for the Bank of Canada — What you need to know

  2. None

    Growing debt could threaten stability as rates rise, says Bank of Canada’s Rogers

  3. The Royal Bank of Canada is predicting that rising interest rates and persistent inflation will push the economy into recession in the first quarter of 2023, one quarter ahead of an earlier forecast.

    A recession in Canada will likely strike sooner than first predicted, Royal Bank says

  4. IMF warns that for many people 2023 will feel like a recession.

    ‘Worst is yet to come’: IMF slashes growth outlook as recession risks grow

Advertisement 5

Article content

Finance Minister Chrystia Freeland warned that the country and global economy would see “challenging days” ahead during an Oct. 19 speech in Windsor, Ont.

Responding to Freeland’s foreboding tone, Carney pointed to high domestic inflation, which most recently clocked in at an annualized pace of 6.9 per cent in September, and the Bank of Canada’s hawkish tone that more rate hikes would be necessary as factors that would contribute to a slowdown.

“The combination of all of that is likely to lead to a recession, or at least a few quarters of negative growth in Canada,” Carney said. “It’s important that we do the right combination of drawing on the strengths that we have, but not weakening our position further. So, we have to use our fiscal resources (and ensure they are) appropriately targeted.”

• Email: shughes@postmedia.com | Twitter:

Advertisement

Comments

Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.



Source links

Related Articles

Leave a Comment

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More

Privacy & Cookies Policy