Evidence of meeting #56 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was dollar.
A recording is available from Parliament.
12:40 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Okay. Getting back to the repo, how does that work in Canada? It's the first time I've heard that term. Is that the Bank of Canada's role?
12:40 p.m.
Governor of the Bank of Canada
Repo is basically short-term lending that is collateralized against a bond. The simplest is against a government bond. You have a government bond and you give it to me for two days. I give you cash. You pay me interest, but you are protected.
12:40 p.m.
Governor of the Bank of Canada
It should be a private market. When we lend, when we provide liquidity to the system, we do it on what is very effectively a repo-type transaction when we provide exceptional liquidity. But we're not talking about a central bank market; we're talking about a private market that is much deeper and broader elsewhere than in Canada, and our position is to the detriment, we think, of our system. This crisis presents an opportunity to redesign that market, and we are working with industry to help them redesign--
12:40 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
But it has to be done quite quickly, because I'm seeing that short sales are coming back in vogue.
12:40 p.m.
Governor of the Bank of Canada
The repo would not address the short-selling issue, but the broader regulatory reform. The broader agenda is moving quickly, but this implementation, even on track, will be with us collectively through 2010, just to guide expectations.
12:40 p.m.
Conservative
The Chair Conservative James Rajotte
Thank you.
Thank you, Mr. Pacetti.
We'll go to Mr. Dechert, please.
12:40 p.m.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
Thank you, Mr. Chair.
Governor Carney, we talked earlier about the value of the Canadian dollar, and you rightly point out it's a source of concern. We're not out of the woods yet by any means, given what that might do to manufacturing in this country. But isn't the value of the Canadian dollar really an international vote of confidence in the Canadian economy and the management of the Canadian economy in comparison with other industrialized nations?
12:40 p.m.
Governor of the Bank of Canada
Currency levels, whether it's the Canadian currency or other currencies, are the product of a variety of fundamental factors: movements in terms of trade, current account positions, fiscal positions, relative interest rate positions, expectations on interest rates and capital inflows, etc. So it is difficult to isolate one particular factor for any particular currency.
12:40 p.m.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
Certainly people wouldn't be buying Canadian dollars if they thought the economy was doing worse than our major competitors, one would expect.
If the Canadian dollar remains relatively high compared to the value of the U.S. dollar, for example, how important are Canadian corporate and business tax rates to maintaining the competitiveness of our Canadian economy? If the Canadian dollar is taking us in one direction, what would you say about tax rates and where they should go over the next little while?
12:40 p.m.
Governor of the Bank of Canada
I believe you'll have the opportunity to meet with the Minister of Finance later today, so I would suggest.... I would prefer not to comment directly on fiscal matters.
I would say again, though, we take those decisions that are ultimately taken by parliamentarians as given and then we take those into account in our outlook for the economy in conjunction with the exchange rate. Other external factors determine the outlook for inflation, and we set policy appropriately in that context.
12:40 p.m.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
Thank you for that.
Can you comment on Canada's debt-to-GDP ratio versus those of other G-7 countries--where we are now, and where you see that going over the next few years?
12:40 p.m.
Governor of the Bank of Canada
Canada entered this crisis with a net debt-to-GDP ratio that was lower than its G-7 peers. On current estimates--OECD estimates or IMF estimates--everybody's net debt-to-GDP ratios are going to go up because of the fiscal stimulus that's been put in place, but Canada is not expected, on the basis of those external analyses, to lose that lowest position in the shorter-term forecast horizon.
12:45 p.m.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
Ms. Block was going to ask a question, and then I think Daryl Kramp may want to.
12:45 p.m.
Conservative
The Chair Conservative James Rajotte
Mr. Carney, I want to follow up on the discussion we were having. I have just one quick question then.
Under protecting the cycle from the banks, this will mean that parties will have to put more capital into the exchange, as I understand it, and more reserves. It's a more stable system, but my understanding is the total amount of credit will be less. Is that a correct understanding, and if so, does that present us with another policy challenge? Because this committee has also been looking at access to credit issues. So if you just want to address that briefly, I'd appreciate that.
12:45 p.m.
Governor of the Bank of Canada
The general equilibrium result does not necessarily mean that credit available to households and businesses will be reduced as a result of these reforms, and that is part of the job of the impact study that is performed through this Basel committee, the international committee. It's partly what it means for the banks, but also what all these changes mean collectively--what are they likely to mean for economies and for availability of credit?
The other issue, Mr. Chair, is how attractive, in relative terms, is lending from a capital perspective versus trading in capital markets activities. One of the things the crisis has revealed is that the amount of capital that was set aside under Basel II regulations was very low relative to the activity in trading books and capital markets activities. Now, that has been very quickly rectified with an adjustment for trading-book capital. I would defer to the Superintendent of Financial Institutions, but I believe that is coming into force in the first quarter. It is agreed, but it's effectively coming into force now.
12:45 p.m.
Conservative
The Chair Conservative James Rajotte
I appreciate that clarification.
I will go to Mr. McCallum, please.
12:45 p.m.
Liberal
John McCallum Liberal Markham—Unionville, ON
I appreciate having a third opportunity.
This might be a lob-ball question, in a sense. I think over the years there's a certain cyclical reappearance of this idea that we should abandon flexible exchange rates and inflation targeting and move to some common North American currency or dollarization or fixed exchange rate. This idea was put about when the currency was very low. I just saw last week an argument to this effect put forward in The Globe and Mail. As I think you know, I've always favoured the status quo, and I wonder if you could explain why you believe that the flexible exchange rate and inflation targeting is better for Canada on economic grounds than some sort of North American common currency.
12:45 p.m.
Governor of the Bank of Canada
Thank you. It's a very important question. I recognize that you've done some of the important research on the issue.
The first time I came before this committee was in the fall, about two years ago, and we had a brief discussion of this issue at that time, but there's certainly nothing that we've seen through the intervening years, through the course of the crisis, that has lessened our view that Canada is well served by having the policy combination of a floating exchange rate and inflation targeting. If anything, that view has been reinforced.
Let me talk briefly about some of the advantages of a floating exchange rate. First, I think we have to recognize that there are going to be shocks on the real side of the economy--domestically, internationally, commodity prices, etc.--and our economy is going to have to adjust to those shocks in some way. The exchange rate acts first as a shock absorber that adjusts in real time quickly to those shocks, which helps our economy to move in the right direction. The alternative to those adjustments is wholesale adjustments of wages and prices that are much more painful and much more protracted than the adjustments, as you know, that can come from the exchange rate.
We saw that in the Asian crisis, the weakness that came from the Asian crisis. Our dollar moved during that in anticipation, as it turns out, of the weakness that ultimately was going to come in commodity prices, importantly, which helped our economy through it. The dollar has moved in the recent past in anticipation of commodities' strengths, in terms of trade strength and relative advantages, which again has helped our economy adjust.
With a fixed exchange rate you still need that adjustment, and you're going to get it in a more painful fashion. One sees that in regional effects in the United States and in Europe as a result of this crisis, where there are needs for real adjustment, but with a fixed exchange rate they are much more painful adjustments. One is better served having a flexible exchange rate or having effectively the same industrial composition, the same composition of the economy, across the countries in the common currency area.
The other thing we would emphasize is that the advantages of fixed exchange rates are largely micro-economic--the move to the fixed exchange rate, lower transaction costs, lower uncertainty, and in some cases lower borrowing costs and enhanced policy credibility. Well, the Government of Canada has--and it has just been reinforced by the U.S. dollar issue the government did within the past three months--one of the lowest borrowing rates in the world; it is one of the best credits in the world. We would be hard-pressed to improve our borrowing costs, as many European countries did, and from a policy credibility perspective I think we feel that both on the monetary and fiscal side we do have that.
So it's hard to see the upside. It's easy to see the downside.
12:50 p.m.
Liberal
John McCallum Liberal Markham—Unionville, ON
Thank you.
I have one last quick question. I agree with what you said, but what do you say to the manufacturer who longs for certainty and would like nothing more than a dollar fixed at, say, 92¢ forever?
12:50 p.m.
Governor of the Bank of Canada
We say, first, that we will conduct our policy to provide the maximum certainty on inflation. That policy consistency reduces overall uncertainty for that manufacturer. It reduces borrowing costs, cost of capital in this country, which helps.
Secondly, we would say that movements in exchange rate do provide important information about where economic forces are going and provide important signals. They also provide, as Mr. Bernier referred to earlier, some advantages in terms of capital investment and otherwise.
All things taken together for the economy as a whole, and that's our job and yours as well to think about, it is our clear view that the advantages of a floating exchange rate, combined with a credible monetary policy framework—that's crucial—far outweigh the perceived advantages of a fixed exchange rate.
12:50 p.m.
Conservative
Daryl Kramp Conservative Prince Edward—Hastings, ON
Thank you.
In winding this session down, let me take this opportunity, both independently and on behalf of the Government of Canada and I would assume the vast majority of people assembled here today and certainly a great number of Canadians, to thank you and tell you that we appreciate your diligence in dealing with this as an unseen, unpredicted by many, circumstance. We're thankful, but if I might just suggest, there are also concerns. I'd like to know, just how close to empty were we in the tank?
In other words, Mr. McCallum and others mentioned that there have been various instruments at your disposal to deal with the problems and difficulties we had, whether those are interest rates or the condition of quantitative easing that you discussed. As a good poker player, did you still have an ace up your sleeve, per se? Did you have cards left to play, so that had we been in a more dire situation or should we return to a dire situation, we'd have a means by which to deal with it?