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Mark Carney seen at a press conference in London on December 16, 2019.Kirsty Wigglesworth/Associated Press
Former Bank of Canada Governor Mark Carney has said Canada is headed for a recession and fiscal discipline will be “imperative” as policymakers enter a period of difficult trade-offs between promoting growth economy and controlling inflation.
In the near term, rising interest rates and slowing global economic activity make “at least a few quarters of negative growth in Canada likely,” Carney told the Senate Banking, Commerce and Finance Committee on Thursday. the economy.
Longer term, the global economy is entering an era that will be defined by higher interest rates, more persistent inflation and greater financial market volatility, he said. This means higher borrowing costs and less available capital for companies, as well as tougher policy choices for governments and central bankers.
“A sound currency and credible fiscal policy will be rewarded. But mistakes will be punished and no one will be truly exempt,” he said.
Mr Carney, who is vice president and head of transition investment at Brookfield Asset Management, joins a growing number of private sector forecasters – including economists from Royal Bank of Canada, Bank of Montreal and the Bank of Nova Scotia – who predict a slowdown in Canada next year.
September inflation figures, released on Wednesday, reinforced this view. Consumer price index inflation eased slightly to 6.9%, but price increases affected a wider range of goods and services, increasing the chances of the Bank of Canada announcing a another 75 basis point rate hike next week. The central bank is rapidly raising borrowing costs and intentionally slowing economic activity in an effort to control prices.
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“I think a recession is very likely globally. And most likely in Canada,” Mr. Carney said. “I would put it this way. air travel these days: we know where we’re going, but we just don’t know when we’re going to get there.
In this deteriorating economic environment, Mr. Carney said politicians and bureaucrats must ensure that monetary and fiscal policies do not work at cross purposes. He cited the economic and political turmoil in Britain as an example of poor fiscal policy management and a warning of the challenges policymakers face in a more volatile economic environment.
Mr Carney, who was Governor of the Bank of England from 2013 to 2020, spoke hours after Liz Truss announced her resignation as UK Prime Minister. His six-week term was defined by a rout in the money and bond markets that followed his government’s announcement of tax cuts that would be funded by new government borrowing.
Many economists believed the tax cuts would raise inflation at a time when the Bank of England was aggressively raising interest rates in a bid to regain control of prices. Bond traders responded by dumping UK government bonds. This caused a large swing in bond prices and yields, and ended up compressing UK pension funds whose investment strategies did not anticipate such large and rapid movements.
The Bank of England had to intervene to prevent a sell-off of government bonds. This put the central bank in an uncomfortable position: it was selling bonds to drive up interest rates, while buying them to prevent pension fund liquidity problems from escalating into a broader financial crisis.
“The UK experience underscores that in an environment of tight monetary policy there will be increasing tension between various macroeconomic objectives,” Mr Carney said.
“So in the UK it wasn’t just the objectives of contrarian fiscal policy and monetary policy, [there were] tensions between financial stability and price stability, which saw the Bank of England both selling gilts, government bonds and buying them.
Mr Carney, who has supported the Liberal Party and is often mentioned as a potential Liberal leader, said the Canadian government was taking the right approach to fiscal policy, with relatively modest and targeted aid for low-income Canadians affected by inflation.
Last month, the government announced a $4.6 billion package that included new payments to uninsured parents to cover dental costs for their young children, a doubling of the GST credit and increased rental assistance. .
Mr Carney said the size of the package relative to the size of the Canadian economy would not be “decisive” in terms of the impact on inflation. However, he warned that too much fiscal support could increase inflation over time. This echoes Bank of Canada Governor Tiff Macklem, who said last week that the federal government’s recent actions were not “correlated” from a macroeconomic perspective.
However, when you add the provincial government’s stimulus measures, fiscal policy begins to affect inflation and the stance of monetary policy, according to Scotiabank Chief Economist Jean-Francois Perrault and Director modeling, René Lalonde.
“As designed, this fiscal support has the unfortunate impact of blunting the central bank’s efforts to fight inflation and may ultimately require higher interest rates to reduce inflation,” they said. wrote Mr. Perrault and Mr. Lalonde in a note to clients this week. They estimated that federal and provincial fiscal measures would force the Bank of Canada to raise interest rates 25 basis points more in the coming quarters than would otherwise be necessary.
While Canada is unlikely to avoid a downturn, Carney said the country is likely to fare better than many of its peers, thanks to its robust labor market, close ties to states United States and its sound financial system.
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