Evidence of meeting #141 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was inflation.
A recording is available from Parliament.
10:05 a.m.
Senior Deputy Governor, Bank of Canada
One thing we're working on is trying to take what we've learned about the impacts of these shocks and forecast them on a go-forward basis.
10:05 a.m.
Liberal
The Chair Liberal Peter Fonseca
Excuse me for having to interject here, members and witnesses. The bells are ringing. I'm just looking for UC so that we can continue.
10:05 a.m.
Some hon. members
Agreed.
10:05 a.m.
Governor, Bank of Canada
I'm just going to underline that typically we have an economic model and we estimate it on historical data. For example, we've raised and lowered interest rates many times, so we can empirically estimate that if we raise interest rates, this is what it does to the economy, and if we lower interest rates, that's what it does to the economy.
We haven't had climate change before, so it's very hard to come up with good estimates, and if anybody says that they have a forecast of exactly what the cost is going to be, frankly, I think you'd want to be a little bit skeptical. Probably the best we can do is provide some scenarios and give some range of the costs. We are working on that, but it is somewhat outside of the way we normally do things, because we normally use past fluctuations to estimate what we think will happen again.
May 2nd, 2024 / 10:05 a.m.
Liberal
Ryan Turnbull Liberal Whitby, ON
I understand that the climate risks and the frequency of those extreme weather events are hard to predict, because they haven't happened in the past as frequently. Certainly climate change is not a new story today; it's been going on for 30 or 40 years or longer.
I guess what I'm trying to get at is that there's quite a lot of international focus on the fact that climate change, in fact, threatens our economic stability, so I want to ask you about that. In your role, how are you thinking about how we mitigate that risk from an economic stability perspective?
10:05 a.m.
Governor, Bank of Canada
Just to be clear, the Bank of Canada does not have a mandate for climate policy. Our mandate is solely monetary policy, controlling inflation and trying to mitigate vulnerabilities in the financial system.
Climate change is a huge force on the economy. It's going to affect the economy. It is already affecting the economy. What we're focused on is working out the implications of that for inflation and what that means from a monetary policy. We're not in the business of trying to estimate the overall impact of climate change on the welfare of Canadians.
10:05 a.m.
Senior Deputy Governor, Bank of Canada
One thing I would add is that if you think of climate risk as the risk of shocks to the economy, you can create more buffers, so in the financial stability world, we're asking financial institutions to hold capital or buffers against those types of risks at a broader economic level.
This is one of the reasons we think productivity needs to be a focus. The more productive the economy is, the more buffer it has to shocks, including climate risk shocks.
10:05 a.m.
Liberal
10:05 a.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you, Mr. Chair.
The key interest rate is 5%. What would the bank consider a neutral rate?
10:05 a.m.
Governor, Bank of Canada
Yes, we have estimates of a neutral rate.
I would like to emphasize that this is a theoretical concept. The neutral rate is the same as the key interest rate in a balanced economy, when the output gap is zero, inflation is at 2% and there are no economic shocks.
10:10 a.m.
Governor, Bank of Canada
The only thing that is certain is that it will never happen because there will always be new shocks.
It is a concept. We have to put something in our model and, in the interest of transparency, we publish our neutral rate estimates. Once a year, we update our neutral rate estimates and the potential rate of economic growth.
Compared to our last report, our neutral rate estimate is now 25 base points higher. It is in the range between 2.25% and 3.25%, with 2.75% being the midpoint.
I want to be clear that it does not have much impact on our monetary policy decisions from year to year. It is actually a concept that applies in the longer term. In the short term, we focus mainly on the measures we have already discussed.
10:10 a.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Okay, thank you.
How many months has it been since your first rate hike to fight inflation? How many months ago was it?
10:10 a.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
How many months has it been since your first hike in the key interest rate?
10:10 a.m.
Governor, Bank of Canada
The first rate hike was in March…. It was about 18 months ago.
10:10 a.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Okay.
I want to quote the economist Barry Eichengreen, from the University of California, Berkeley. He noted that, in the past, big price increases made it easier to manage inflation. By way of example, he said that certain periods taught us the importance of preserving the independence of central banks. So that lesson was learned from periods of managing inflation. He went on to say that we also learned that it is essential for central banks to establish a hierarchy of policy priorities and to communicate those priorities to financial markets and to the public. Those are some lessons gleaned from highly inflationary periods.
Are you already seeing a lesson emerge from the current inflationary period?
10:10 a.m.
Governor, Bank of Canada
Barry Eichengreen is an economist who examines history.
I wrote an article about that recently that was included in a publication by the Centre for Economic Policy Research. I also gave a few speeches on the topic, near the end of last year. It was about the lessons learned from the recent inflationary period. A whole chapter is devoted to that. It would be too long to describe, but there are a few important lessons.
One of those lessons was noted by the senior deputy governor: When there is excess demand in the economy, supply shocks have a greater impact. We have had supply shocks in the past 20 years, but in most cases the effects were “temporary”. I want to stress the word “temporary”. When we saw that that the shocks continued, we thought initially that they were temporary. But since there was excess demand in the economy, we saw that those shocks were having a much greater impact on inflation than in the past. That is one of the lessons we learned.
I think there is another lesson that is probably even more important. It is not really anything new, but something new that many Canadians had to experience, unfortunately. There had not been major inflation for many years, since the 1970s and 1980s. For many Canadians, it was truly the first time they had experienced inflation. So it is not a new lesson, but we observed once again that Canadians do not like inflation. It creates a lot of divisions and makes it look like the system isn't working. Canadians work hard, but their wages are not going as far as they used to.
10:15 a.m.
Liberal
The Chair Liberal Peter Fonseca
Thank you, Mr. Ste‑Marie.
Thank you, Governor.
We are going to MP Davies. You'll be our last questioner, MP Davies.
I just want everybody to hold tight, because then we're going to have to transition to our other meeting. Everybody can stick to their desks.
We have MP Davies now, for four minutes.
10:15 a.m.
NDP
Don Davies NDP Vancouver Kingsway, BC
Thank you.
Ms. Rogers, I realize you're not a policy source for how to deal with productivity, but you did raise, in a very profound and important way, the issue of productivity in Canada.
I want to press something. I was asking about the relationship between the policy of corporate tax cuts that were supposed to spur more business investment. In your answer, you said that this problem has persisted through different tax regimes. For the last 20-plus years, the policy in Canada on corporate tax rates has been to keep them low or to reduce them. There has been no reverse policy of increasing corporate tax rates.
Would you agree with me that one thing we can probably predict is that a long-term policy of low corporate tax rates has not proved particularly effective in incentivizing businesses to invest in R and D, innovation and technology?
10:15 a.m.
Senior Deputy Governor, Bank of Canada
I think what I would be inclined to agree with is the first part of your statement, that this has persisted over a long period of time in different regimes.