Recession likely amid global economic downturn, fiscal restraint needed: Carney –

Former Bank of Canada Governor Mark Carney says a global recession is likely, making it difficult for Canada to avoid a similar economic downturn.

During his testimony before the Senate Banking Committee on Thursday, Carney said Canada may fare better than others due to mitigating factors such as the country’s ties to the United States as well as the strong job market recovery from the pandemic.

A growing number of economists are now forecasting that Canada will enter a recession as the Bank of Canada and other central banks around the world hike interest rates to cool high inflation.

Although inflation has slowed in recent months, the pace of price growth is still exceptionally high, well above the Bank of Canada’s 2% target.

In September, Canada’s annual inflation rate was 6.9 percent.

In an apparent change of tone on the state of the economy, Deputy Prime Minister Chrystia Freeland warned Canadians this week that tough times are ahead as the economy reacts to higher interest rates.

“Mortgage payments will go up. Business will stop booming,” Freeland said. “Our unemployment rate will no longer be at its record low.”

The Bank of Canada has raised interest rates five times since March, from 0.25 percent to 3.25 percent. The rate hikes mean higher borrowing costs for Canadians and businesses, which should slow spending in the economy.

Despite raising interest rates at one of the fastest paces in history, the central bank has warned interest rates must rise to cool high inflation. Another significant rate hike is expected on Wednesday.

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Carney praised the Bank of Canada “for being smart and aggressive in cutting interest rates.”

When asked what caused Canada’s high inflation, Carney replied that it was initially triggered by global circumstances but has since become a domestic problem.

The former governor, who also served as governor of the Bank of England, said rising commodity prices and supply chain problems fueled inflation during the pandemic, but inflation has since spread to other sectors of the economy.

Carney said while the pandemic support measures were necessary when COVID-19 hit, they lasted too long and fueled inflation.

“With hindsight being 20/20 — and hindsight is always 20/20 — I guess this package took a little longer than strictly necessary,” Carney said.

The former governor said the current economic climate calls for fiscal restraint, although targeted support is warranted.

“This is a time, I believe, to reduce deficits, not increase them.”

This report from The Canadian Press was first published on October 20, 2022.

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