Banks don’t believe Trudeau’s promise that new spending will not support inflation

Prime Minister Justin Trudeau announced a new set of measures aimed at helping Canadians to handle sharp prices growth. However, some large banks warn that new spending will only worsen the issue.

Canada’s government will double a sales tax rebate received by low-income families for a period of six months, which will cost $2.5 billion. In addition to it, there will be extra $700 million directed for housing benefit for renters, and a promised dental-care plan financing.

According to Trudeau, such measures are “sufficiently targeted and we are sure they will not fuel the inflation.”

“We are keeping the fiscal firepower and at the same time making sure that those who need support will get it,” – he added.

Before that, Trudeau has avoided implementing new measures for easing the burden of growing prices, even when inflation reached its highest level since the early 1980s. One of the reasons for this unwillingness to act were concerns that more spending may fuel inflation. However, it’s become more and more difficult to keep doing it, especially after Pierre Poilievre’s victory as a new Conservative Party leader.

He focused actively on the cost of living during his campaign, and within hours of Trudeau’s announcement, he criticized the prime minister for introducing “more inflationary spending that will not solve the problem for everyday Canadians.”

Poilievre said: “The problem with spending more money as a solution to inflation issue is that it simply pours more gasoline on the inflationary fire. This is exactly what Justin Trudeau keeps doing right now.”

Economists have already started warning Trudeau against such measures. Since last week, three of the country’s biggest commercial lenders (CIBC, BMO, Nova Scotia) have expressed their concern over using revenue windfalls for extra spending.

Scotia raised its criticism on Tuesday. “We can definitely assume that this will increase pressures on core inflation,” – economist Derek Holt noted. “Any belief that it will ease inflationary pressures must have studied different economics textbooks.”

The government’s new measures come amid the central bank’s aggressive rate-hike cycle. As you know, the Bank of Canada raised its key lending rate by 0.75% to 3.25% last week, making it the highest policy rate among major advanced economies.

Although Canada’s headline inflation was down slightly to 7.6% in July due to a decline in gasoline prices, the BoC pointed to rising price pressures and core inflation, adding that it plans to keep increasing rates in the nearest future.

Between Trudeau’s announcement of new spending measures and a hotter-than-expected U.S. inflation report, Holt said the central bank will probably have to raise rates even above 4% before starting to slow down.