Bank of Canada maintains stance on rate hike ahead of Nov. 5 budget release

The Bank of Canada is standing by its decision last week to hike interest rates for the first time in three years, even though it could mean many Canadians and businesses will pay more for some mortgages and other loans.

This also comes as the federal government plans to release its next budget on Nov. 5, which is expected to include tax incentives for small and medium-sized businesses to reinvest.

Governor Tiff Macklem spoke Tuesday before the House of Commons Standing Committee on Finance.

“Last week, we raised the policy interest rate by 25 basis points, bringing it to 2.5 per cent. This was the first interest rate increase since July 2023,” said Macklem in his opening statement.

“With the outlook for inflation substantially higher and the economy showing resilience, an increase in the policy rate was needed to reduce the risk that elevated energy prices could spill over and become generalized inflation.”

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Interest rates that Canadians and businesses are charged by commercial banks and other lenders are based mainly on the overnight rate set by the Bank of Canada, particularly with variable rate loans. In other cases, fluctuations in bond market yields can also determine more long-term products like fixed-rate options.

The central bank raised its benchmark last week in anticipation of higher inflation, especially as higher oil and energy prices drive up prices for goods and services beyond gasoline.

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Macklem said there was mounting pressure to raise rates as the Iran war leads continues to see surging global energy prices and supply chain shocks.

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“With the war in the Middle East persisting, global oil prices have increased and are expected to remain higher for longer. This is hitting Canadians at the gas pump and increasing costs for many businesses,” said Macklem.

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“The prices of gasoline, diesel and heating oil are elevated and are expected to remain higher for longer. This is hitting consumers directly and raising business costs for production and transportation.”

“While businesses have mostly absorbed higher input costs so far, past experience and Bank surveys suggest that cost pass-through will increase over the next year.”

Macklem was then asked by Kent MacDonald — Liberal MP for Cardigan, PEI — about how the federal government’s newest incentives, including the so-called productivity mega-deduction, are supposed to appeal to Canadian businesses while interest rates are rising.

“We totally understand that there is no immediate benefit of raising interest rates, but that’s the tool we have to moderate this pass through of costs to get inflation back to target,” Macklem said in response.

“If we don’t do it, what it means for consumers is that the prices of everything will be going up, not just gasoline, and that’s exactly what we want to avoid.”

Senior Deputy Governor Carolyn Rogers at the central bank also responded.

“A lower interest rate might help, on balance, with the incentive investing, but not if it comes with increasing inflation.”

“So if we kept interest rates low, and the trade off was inflation got away on us, then I don’t think that’s an environment where they would feel comfortable investing either.”

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2:05 Business Matters: Inflation rate rises to 3.1% in September

The exchange also highlighted the broader relationship between the Bank of Canada’s monetary policy and the federal government’s economic agenda — although the Bank of Canada stresses that it operates independently of the federal government.

Macklem told members of Parliament on Tuesday he doesn’t think the federal government’s fiscal policy is at odds with the central bank’s efforts to control inflation.

Conservative finance critic Michael Chong asked Macklem for his opinion on the government’s affordability efforts. The central bank governor declined to answer directly.

He said he only comments on the government’s fiscal policy when spending is approaching unsustainable levels, or when the government’s actions are working against the Bank of Canada’s efforts to tame inflation.

“In the current circumstances, I don’t think either of those criteria are met,” he said.

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Macklem did comment publicly on the pace of government spending three years earlier. He warned at the time that fiscal spending was adding to demand faster than it was increasing supply, which was “not helpful” for getting inflation back under control.

Conservative Leader Pierre Poilievre regularly rails against the Liberal government over what he calls inflationary spending. He has urged the government to slash spending ahead of Thursday’s budget to help get costs under control for Canadians.