New budget spending may cause more interest rate increases

Although Canada’s federal government considers the spending in its new budget reasonable, prominent Bay Street economist David Rosenberg says the additional fiscal stimulus may lead to even more rate increases from the central bank than it was initially planned.

“We are practically a fully-employed economy, so you don’t need to increase demand when the economy has no output gap and the Bank of Canada is in a quite difficult situation. It will lead to more interest rate hikes amid fiscal stimulus that is not well timed,” – noted Rosenberg, president, chief economist and strategist at Rosenberg Research.

The federal budget includes $60 billion in new spending, although it’s less than it was expected in the December fiscal update and less than Bay Street has predicted.

According to Deputy Prime Minister and Finance Minister Chrystia Freeland, the government needed to change the strategy and let the provinces and individuals know that the “period of extraordinary COVID spending was over.”

Nevertheless, Rosenberg believes much of the new spending is actually unnecessary with the current economic conditions.

“I worry about the fact that the government just made the BoC’s anti-inflation strategy much more complicated. If you look at the budget, you’ll see that it adds about one-third of a percentage point to this year’s demand growth that it doesn’t really need from a government sector. In fact, it’s exactly the wrong time of the cycle,” – he added.

The recent labour report from Statistics Canada shows that Canadian employers kept creating jobs last month, following incredible results seen in February. This is one more sign of the economy’s resilience through the latest COVID wave. The jobless rate was down to 5.3%, marking the lowest level since the mid-1970s.