Bank of Canada Governor Tiff Macklem said on Tuesday that the Carney government's current fiscal spending plans have not yet placed noticeable pressure on inflation, nor have they prevented the central bank from achieving its 2% inflation target.
However, with the Bank of Canada last week raising interest rates for the first time in more than three years, debate is heating up over whether government fiscal stimulus and the central bank's tightening monetary policy are working against each other.
At the same time, the discount on Canadian heavy crude relative to U.S. crude has widened to its highest level since 2018, further highlighting the complex situation facing the country's economy.
Testifying before the House of Commons finance committee on Tuesday, Macklem said the central bank typically offers explicit opinions on government fiscal policy only in two situations: first, when a government's fiscal position becomes unsustainable and shocks financial markets; and second, when fiscal policy and monetary policy offset each other, making it harder for the central bank to bring inflation back to its 2% target.
"In the current situation, I don't think either of those conditions holds," he said. He noted that the Canadian economy still has spare capacity, and that the government plans to direct more fiscal resources toward investment rather than day-to-day operating spending, so existing fiscal measures have not significantly increased inflationary pressure.
The remarks came as the federal government prepares to release its new annual budget on Thursday. Carney has previously announced a large-scale tax incentive measure aimed at boosting productivity, expected to cost C$36 billion over five years. The policy will broaden the scope of immediate tax deductions for business investment to encourage companies to increase capital spending.
Markets expect the new budget's overall fiscal deficit to be roughly equivalent to 2% of Canada's gross domestic product (GDP).
Macklem believes the impact of fiscal policy on the economy depends not only on the scale of spending but also on how the money is specifically used. He told lawmakers that the key question is whether the government is spending to stimulate demand in the short term or investing in areas that can enhance future economic growth capacity.
Macklem has previously criticized Canada's federal and provincial governments for focusing too much on stimulating consumption and demand while paying insufficient attention to expanding the economy's productive capacity. However, his assessment of the Carney government's current fiscal plans has been relatively positive.
In written remarks submitted to the committee, Macklem projected that Canadian economic growth could accelerate by 2027 as exports and investment strengthen and with the support of fiscal measures. He also said last week that the central bank's forecast for future investment growth may be conservative, even though investment was already among the items the central bank raised most significantly compared with its July projections.
Bank of Canada's First Rate Hike in Over Three Years Exposes Fiscal-Monetary Policy Divergence
The Bank of Canada last week raised its policy rate to 2.5%, its first rate hike in more than three years, mainly to prevent inflation pressures triggered by rising international oil prices from spreading further into other goods and services.
Macklem said on Tuesday that further rate increases remain possible, but given the high degree of uncertainty in the current economic environment, the central bank will remain cautious in subsequent policy adjustments.
However, not all economists agree that government fiscal policy and the central bank's monetary policy are currently free of conflict. Doug Porter, chief economist at BMO, noted that Canada's federal and provincial governments are helping the economy cope with trade uncertainty through broad fiscal support measures, but at the same time the Bank of Canada is suppressing demand by raising borrowing costs, creating an obvious contradiction in policy direction.
Porter said: "Fiscal policy is designed to help the economy get through a difficult period caused by trade uncertainty." He further noted: "I think monetary policy and fiscal policy are offsetting each other."
Still, Porter also said that if Canada and the United States can reach an agreement to reduce trade policy uncertainty and lower tariffs, his judgment that the two types of policy are in conflict could change. This means the future direction of Canada's economic policy depends not only on domestic inflation and fiscal spending but also on changes in U.S.-Canada trade relations.
Canadian Heavy Crude Discount Widens to Highest Since 2018
Meanwhile, Canada's energy industry is facing another challenge: even though international oil prices remain above US$100 per barrel, Canadian heavy crude is selling at a steep discount to U.S. crude, limiting some oil producers' ability to benefit from the global oil price rally.
Data showed that early on Tuesday, the discount on Western Canadian Select (WCS) from Alberta relative to the monthly average futures price of U.S. West Texas Intermediate (WTI) widened to US$31.70 per barrel, the largest discount since November 2018. The discount on Cold Lake crude, another Canadian heavy oil benchmark, in the U.S. Gulf Coast market also widened to US$23.10 per barrel, reaching its most extreme level in about eight years.
A wider discount on Canadian heavy crude means that even if international crude prices rise, some Canadian oil producers may receive sales prices significantly below international benchmark prices. Imperial Oil, the Canadian oil sands producer owned by Exxon Mobil (XOM.US), said on its earnings call last week that it expects Canadian crude prices to remain relatively low in the fourth quarter.
However, the trend affects different energy companies differently. For large oil sands producers such as Suncor Energy (SU.US), which also have refining operations, lower heavy crude purchase prices may benefit refining margins. But for companies that mainly rely on crude extraction and sales, a wider discount may squeeze revenue and profit space.
This Round of Discount Widening Is Mainly Driven by International Factors
It is worth noting that the last time Canadian heavy crude saw such a large discount was in 2018. At that time, Canadian crude production growth exceeded pipeline transport capacity, leaving large volumes of crude unable to reach consumer markets in time, and the WCS discount relative to WTI once approached US$50 per barrel. Because the situation was so severe, the Alberta government eventually imposed mandatory production cuts on large crude producers. Those restrictions were gradually relaxed over the following two years and eventually lifted.
However, unlike the 2018 crisis, which was mainly caused by local Canadian pipeline transport bottlenecks, this round of discount widening has been driven more by changes in the international energy shipping market. The ongoing war with Iran has disrupted global energy supplies, driving international tanker freight rates sharply higher and especially affecting crude transport costs in the U.S. Gulf Coast region. At the same time, more Venezuelan heavy crude is being shipped to U.S. refineries rather than to Asian markets, intensifying competition for Canadian heavy crude in the U.S. market.
The U.S. Gulf Coast is an important export destination for Canadian crude. As transport costs rise and alternative supplies increase, Canadian crude producers have had to accept larger price discounts to remain competitive.
Still, the wider discount has also prompted some Canadian crude exports to shift toward the Pacific coast. The Trans Mountain pipeline, which connects northern Alberta to Vancouver, has become an important alternative export channel. Data showed that tanker exports from ports along the pipeline hit a record high last month. Although Aframax tanker freight rates used on the Trans Mountain pipeline have also risen, the increase is smaller than that of very large crude carriers serving the U.S. Gulf Coast. In addition, the relatively shorter voyage from Canada's west coast to East Asian markets gives those export routes an advantage in transport costs.
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