09:34 AM EDT, 05/29/2024 (MT Newswires) -- Canadian Finance Minister Chrystia Freeland says she's done everything right to set up the Bank of Canada (BoC) for rate cuts, noted Scotiabank.

Freeland's exact words Tuesday were that she has "been very mindful of acting in such a way that would create conditions that support the decline in inflation, or creating conditions that would make it possible for the bank to bring interest rates down."

According to the bank, there are four cautions here:

For one, because of front-loaded spending in prior announcements and the recent Budget, Freeland's government is still part of the "cabal" of Canadian governments across all levels that is adding ongoing fiscal stimulus long after it'ss no longer needed. The BoC's own April forecasts showed government spending adding 0.7ppt to growth in each of this year and next before incorporating the Federal Budget but after including the effects of the provincial budgets.

That number may push a little higher in the July Monetary Policy Report (MPR) when it incorporates the Federal budget. Federal program spending is on a long-term upward path with much of that front-loaded in prior announcements. The proposed hike in capital gains taxes won't materially offset this spending surge especially if its guesstimated revenues are spent later on rather than going toward a lower deficit as some appear to assume, while also assuming that the hike actually sees the light of day pending still missing legislation. Ongoing fiscal easing is fighting prospects for monetary easing and so Freeland's halo is a touch tilted.

A second caution is that the 'conditions' to which she refers may include soft core inflation this year. If so, then Canada needs to be very careful this soft patch proves to be a durable one. The government's efforts to apply pressure on grocers and telecommunications companies to reduce prices are very likely yielding only temporary influences. Just like temporary influences from El Nino on price categories like clothing and footwear and airfare. C-suite bullying by the government will eventually be overcome by the need to focus on shareholders because if Scotiabank extrapolates the price declines in categories like internet services and cell phone services then they'll soon become basically free.