According to a new report released on June 12 by CIBC Capital Markets, governments could be doing more to combat inflation by keeping a tighter grip on their wallets.
The nation over, Canadians are battling with increasing costs in everything from food to lease.
However, the report stated that government spending is increasing growth while the Bank of Canada is attempting to slow growth by raising interest rates.
In an effort to reduce inflation, which is currently hovering around 4.4 percent, the Bank of Canada increased its rate by a quarter of a percentage point last week. Despite a decrease from last year, inflation is still causing pain. The report cautions that more rate climbs are presumably arriving in a further work to slow expansion. As a result, homeowners renewing their mortgages may face increased financial hardship as a result of rising interest rates.
The report warns, “If the Bank of Canada hasn’t sufficiently eased policy by then, mortgage renewals for Canadians in 2024 and 2025 could be a significant risk to household financial stability.”
In addition, it states that interest rates won’t go down for at least a year.
It was stated that higher interest rates would also have a negative impact on housing construction, which would come at a time when many people across the nation are calling for more home construction.
The report stated, “One disadvantage of an exclusive reliance on higher interest rates is that it places housing construction at the center of the resulting economic slowdown.” In a setting where a lack of housing is putting pressure on apartment rents and the overall cost of homeownership, that is not ideal.
According to the report, spending should be controlled by both the federal and provincial governments.
According to the statement, “A deeper fiscal belt tightening could accomplish the same thing, and as we argue here, would have had side benefits for the country that we won’t see by letting monetary policy fly alone.”
These advantages might consist of keeping interest rates a little bit lower and not adding as much debt to the ledgers of the government.
According to the report, “Canada’s overall public debt burden is still manageable, but it has deteriorated” and “it does mean that future federal and provincial budgets will collectively face a higher debt servicing bill, leaving somewhat less room for programs.” Canada’s overall public debt burden is still manageable.
Despite the fact that, in recent times, some provincial governments have been the worst offenders, the report assigns responsibility for inflation-inducing spending to both the federal and provincial governments.
“While a significant part of the [provincial] spending was marked as an approach to assisting families with the cost for most everyday items, the knock up in moves blew away expansion and addresses an improvement in genuine terms,” it said.
In any case, it adds the government staple discount will likewise have an effect.
“The subsequent quarter will see a lift coming from the ‘basic food item discount’ sent by the national government, which in the event that all spent in the subsequent quarter would lift Gross domestic product by an annualized 0.4 percent.'”
According to the report, at the same time, private-sector employment has outpaced government hiring, which could exacerbate the inflationary fire.
According to the statement, “The tightness of the labor market and its impact on wage inflation is a key concern for the Bank of Canada.”
Lastly, it claimed that combining a slowdown in spending with changes to interest rates would create a more favorable environment for business investment.
According to the statement, “a policy mix that was tougher on fiscal policy and easier on interest rates would provide a broader improvement in the capital spending backdrop.”