Evidence of meeting #14 for Finance in the 39th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was bank.
A recording is available from Parliament.
4:45 p.m.
Conservative
4:45 p.m.
Liberal
4:45 p.m.
Conservative
4:45 p.m.
Conservative
Dean Del Mastro Conservative Peterborough, ON
Thank you, Mr. Chair. I think the record will show I'm factual, in any event.
Mr. Carney, a lot of actors in the economy out there, especially manufacturers struggling to remain competitive, feel that the value of the dollar is too high and that the Bank of Canada, instead of just focusing on inflation, should adopt a monetary policy that would lower the value of the dollar.
Could you explain to the committee why it is important to our country for the bank's monetary policy to aim at maintaining a low and stable inflation rate?
4:45 p.m.
Adviser to the Governor, Bank of Canada
Thank you for that.
One of the problems with success is that you forget why you put in place the framework to begin with.
As I said in my remarks, we've had 15 years of low, stable, and predictable inflation. We owe it to my predecessors and the excellent and dedicated staff at the bank for achieving that success, but we have had 15 years, and people do forget about the costs of inflation. The cost of inflation, I want to emphasize, is what we risk putting in peril if we take our eye off the ball, and I want to assure you I will not take my eye off the ball.
Inflation erodes the value of money. I will put an aphorism in, a Yogi Berra: a nickel ain't worth a dime any more. That is the reality. We see the debate about what to do with a penny; ultimately, that's the consequence of years of inflation compounded.
Second, inflation creates uncertainty. It creates uncertainty and has a marked impact on investment and consumption, but investment ultimately, and output and jobs.
Third--and I mentioned this in my remarks, but it really does bear repeating--inflation affects the most vulnerable. It's the poorest people in society who are least well positioned to hedge against inflation and least well positioned to use sophisticated financial products or contracts to protect themselves.
The fifth and most important point when we think about inflation--I shouldn't say the most important point, but the fifth point--and one that really does bear emphasizing, is that inflationary booms always end badly, and you often get a boom when you start to have a run-up on inflation. They always end badly, and Herculean effort is required to put us back onto the path we were already on.
Right now we have low, stable, predictable inflation. We have expectations well anchored. It's incredibly valuable. To those who think about changing the target or adding additional targets when we only have one instrument, I would point out the risks they run in terms of impacting all these costs.
4:50 p.m.
Conservative
Dean Del Mastro Conservative Peterborough, ON
In short, maintaining low inflation is a measure to avoid recession.
4:50 p.m.
Adviser to the Governor, Bank of Canada
You cannot guarantee it, but it is consistent with it.
As I said in my remarks, the experience of inflation targeting has coincided with the second-longest expansion in our history and low volatility around output and interest rates.
4:50 p.m.
Conservative
Dean Del Mastro Conservative Peterborough, ON
Just for the benefit of Canadians, can you explain the difference between core inflation and what factors are taken out when you measure core inflation?
4:50 p.m.
Adviser to the Governor, Bank of Canada
Thank you for that.
As you know--and it bears repeating--the bank targets total inflation. That's the objective, because that's the basket Canadians recognize in terms of consumption. There is volatility around eight items in particular in that total basket of 31, particularly related to food and energy, so we take those out in terms of our day-to-day targeting. We are mindful of them, and we look at core inflation, which is very highly correlated.
When we do that--and this is important, and I talked about those four big trends--we have to be mindful of whether you can get upward drift in those items, and we have seen a strong upward drift in energy. We are starting to see globally a strong upward drift in agriculture. Even within core, because of China in particular being integrated, there is a strong downward drift in manufactured goods, so we have to be mindful.
It works, but it's not the sole method.
4:50 p.m.
Conservative
4:50 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Thank you, Mr. Chairman.
Congratulations again, Mark.
I suppose this is part of an interview process, so I am going to get rid of the thorny questions first. This was the favourite Conservative question when we had nominations from apparent Liberals coming before committees.
Have you been a member of a federal political party, Mark, in the last five years? That's just to make it easy on you.
4:50 p.m.
Adviser to the Governor, Bank of Canada
We'll go farther back. I've never been a member of any political party, no.
4:50 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Okay, great.
Now take me through the process. What happened? Did you apply for this position? Did somebody approach you? How did that come about?
4:50 p.m.
Adviser to the Governor, Bank of Canada
I applied for this position. There was a public announcement that you would have seen in major Canadian papers and internationally, and I applied for it. It was just like for any other job.
4:50 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Subsequently there was an interview process. How did that...?
4:50 p.m.
Adviser to the Governor, Bank of Canada
There was an interview process. There is a board of governors of the bank--not the board that makes the policy decisions but a board of governors of the bank that represents various provinces in the country. There's an executive committee of the board. That executive committee--
4:50 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Was the finance minister involved in that at all?
4:50 p.m.
Adviser to the Governor, Bank of Canada
The finance minister is not on the board.
4:50 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
He is not on the board.
Just take me through--some of the members have spoken about it--your involvement in the income trust decision. How about the Montreal accord? How much involvement did you have in the Montreal accord, and what were your responsibilities there?
4:50 p.m.
Adviser to the Governor, Bank of Canada
In my position at the Department of Finance I had overall senior oversight responsibility for international operations in the financial sector, as well as budgetary responsibilities, and I was the alternate member of FSC, which is the financial stability committee, if you will. So it was in that context that I was involved, and continued to be involved, in the development of the Montreal accord, up until my getting this position.
My role and the government's role was I think to play a coordinating role, when events were moving extremely fast, and to ensure that all parties were aware of the potential consequences of their decisions and the potential value of sitting down and negotiating, taking a period of time and seeing whether there was a better solution than just running against the wall. But it was up to the parties to make that decision.
4:55 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
I don't mean to interrupt you. It's just that our time is limited and I'm trying to get to a point here.
Was there anybody from the Bank of Canada present at that meeting?
4:55 p.m.
Adviser to the Governor, Bank of Canada
These were individual conversations. We did not convene a meeting of all participants. That was done by the participants. They took the decision to do that.
Subsequent to the accord, there was a meeting of the Governor of the Bank of Canada, me, other representatives of the Bank of Canada, and some of the principal investors.
4:55 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Right, but you were there at the time representing the Department of Finance.
4:55 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Okay.
Now what happens if in the future, because we don't know where this asset-backed commercial paper is going to go...? We don't know. We're still not sure how much is really bad out there, and we don't know what the crisis is going to be in terms of the banks actually claiming the right amount of writedowns in the numbers we're seeing.
What's going to happen if we have a Northern Rock type of example? Would you be responsible for that? Are they going to say to you that you gave them advice, you helped them out on the deal making, and now that you're the Governor of the Bank of Canada you're responsible for bailing them out? Do you have any responsibility for that?
