Public Accounts Committee on May 7th, 2024

[Carolyn Rogers]

Correct.

[Adam Chambers, Conservative, Simcoe North, ON]

I definitely look forward to the projections of the losses.

If I may, I'll just switch gears a little bit and talk about M2 money supply.

I saw a chart that showed the Bank of Canada's balance sheet shrinking over time, which makes sense with quantitative tightening, but I've also seen a chart showing M2 is actually growing. I'm trying to understand why that's the case. If the bank is shrinking the balance sheet, how is the measure of M2 growing? Where's the money coming from?

[Carolyn Rogers]

There are different definitions of the supply of money, and they measure different things.

M2 would largely grow or shrink according to demand for loans at banks. I think of M2 as the supply of money that's generated by commercial banks. As there is an increasing demand for loans, banks can increase the supply of M2 by providing more loans. Those loans ultimately end up in savings accounts and other places around the economy.

Generally the demand for credit has been coming down and the M2 numbers are relatively low over historical perspectives. They are lower, but you wouldn't necessarily see those show up on our balance sheet.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you. I have two quick follow-ups on that.

Is it possible that the government's borrowing activities, which are very substantial—not the rollover in debt per year, but the new funds of $102 billion required this year and $63 billion last year—are contributing to the growth of M2? It's a demand for credit.

[Carolyn Rogers]

Not directly, but I guess indirectly, yes.

[Adam Chambers, Conservative, Simcoe North, ON]

Okay, so it's potentially indirectly.

This is my last question, Mr. Chair.

Would you be able to share the components of M2, the parts of M2 that are growing, with the committee so that we might be able to understand and try to figure out where the money's coming from?

[Carolyn Rogers]

Yes, I think we can probably do that.

[Adam Chambers, Conservative, Simcoe North, ON]

Okay, thank you very much. I appreciate your time.

[The Chair, Conservative, John Williamson]

Thank you, Mr. Chambers.

I'll turn now to Ms. Khalid.

You have the floor for six minutes, please.

[Iqra Khalid, Liberal, Mississauga—Erin Mills, ON]

Thank you very much, Chair, and thank you to the witnesses for being here today.

I'll start with the Bank of Canada representatives.

In the bank's latest monetary policy report, you note that there's been a downward momentum in core inflation and that should this continue, it will put inflation down further.

Can you expand on this a little bit and help us understand when we can expect to see inflation rates return to target?

[Carolyn Rogers]

My colleague and I are here on the assumption we wanted to talk about public accounts and the bank's financial statements today. The governor and I appeared twice last week—once in front of the House finance committee, once in front of the Senate bank committee—and we've answered most of these questions.

I can maybe give you a short answer.

We're tracking a number of things ahead of each interest rate decision. We pay close attention to core inflation, because it's a good measure of what we call the underlying momentum in inflation, and it strips out some of the more volatile elements. That's a number we pay close attention to, but we're looking at a number of variables each time we make a decision. Our next decision is in a couple of weeks.

[Iqra Khalid, Liberal, Mississauga—Erin Mills, ON]

What are you projecting for that next decision?

[Carolyn Rogers]

I'm projecting that we'll make it with the data that we have in front of us at the time of that decision.

[Iqra Khalid, Liberal, Mississauga—Erin Mills, ON]

Thanks.

After the budget was tabled, Governor Macklem made comments about the government's fiscal guardrails and about how the budget committing to those guardrails is helpful. As we see core inflation continue to come down, can you expand on your comments about how Canada's fiscal position has not really changed since the budget was presented?

[Carolyn Rogers]

Again, I would just repeat the remarks that we made last week.

[Iqra Khalid, Liberal, Mississauga—Erin Mills, ON]

I'm sorry; I wasn't at that committee, so if you could....

[Carolyn Rogers]

Sure. I'm absolutely going to repeat them.

We look at the overall spending of all levels of government when we make our projections, and we take that as a given. The budget that came out most recently from the federal government came out between our projections, so we will take a close look at it, and it will be incorporated into our next forecast. However, as the governor said last week, the broad outline of the budget and the additional spending combined with the tax measures kept the government within its fiscal guardrails. To that degree, we don't expect that the budget will have a material impact on inflation.

[Iqra Khalid, Liberal, Mississauga—Erin Mills, ON]

Thanks for that.

Many countries are dealing with very similar economic challenges and uncertainty in tackling the challenge of bringing inflation down. Can you perhaps speak to how Canada is faring in comparison to other G7 countries?

[Carolyn Rogers]

The country that many Canadians watch most closely would be the United States. I would say, broadly, that in the United States right now, the economy is relatively stronger compared to the Canadian economy, and inflation is a little “stickier”; that's the term we would use. They're having a more difficult time getting inflation down. Underlying inflation looks to be coming down a little more quickly in Canada. We need to see more data, but that has been what I would characterize as the most recent trend.

[Iqra Khalid, Liberal, Mississauga—Erin Mills, ON]

Is it a fair comparison to compare the U.S. economy with the Canadian economy? I know we have significant differences between the two in how things operate. Is there a more comparable G7 nation that you think you can perhaps compare Canada to?

[Carolyn Rogers]

I think the reason we often compare Canada to the U.S. is that it's an economy that has a relatively big effect on our own. It's our largest trading partner. I think that's really the reason we often compare Canada to the U.S.

[Iqra Khalid, Liberal, Mississauga—Erin Mills, ON]

I know we often say—and in fact it's accurate—that in the past eight years, we have signed more trade deals with other countries across the world than at any time in history, trying to diversify our own economic prospects here in Canada. Do you think that has had an impact on how our economic recovery has been going?

[Carolyn Rogers]

In general, for a small open economy like Canada, trade deals are an important part of strengthening our economy. I'll put it that way.

[Iqra Khalid, Liberal, Mississauga—Erin Mills, ON]

Thanks very much.

I'll turn to our finance officials here.

The public accounts reported that the deficit was $17.5 billion lower than forecast. Given this fact and the fact that we maintain both the lowest deficit and the best net debt-to-GDP ratio of any G7 country, what does that say about the direction of our fiscal policy here in Canada?

[Evelyn Dancey]

The trends you've identified are again confirmed in the budget tabled, and we anticipate retaining that kind of fiscal strength in an international comparative context.

We have projected nominal deficits that are modest in size and projected to fall over our budgetary horizon, as well as a diminishing debt-to-GDP ratio, which is the government's fiscal anchor. Thus far—I'll just repeat the use of the terminology—the fiscal guardrails or guideposts that have been established by the government have supported a fiscal strength that has been noted by the credit rating agencies. We continue to have our AAA rating. We hope to continue that in the future, and I think our guardrails are a part of that.