Evidence of meeting #23 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was first.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

  • Mark Carney  Governor, Bank of Canada
  • Tiff Macklem  Senior Deputy Governor, Bank of Canada
  • Richard Jock  Chief Executive Officer, Assembly of First Nations
  • Darwin Durnie  President, Canadian Public Works Association
  • Garth Whyte  President and Chief Executive Officer, Canadian Restaurant and Foodservices Association
  • Clarence T. Jules  Chief Commissioner and Chief Executive Officer, First Nations Tax Commission
  • Mary Simon  President, Inuit Tapiriit Kanatami
  • Shannon Bittman  Vice-President, Professional Institute of the Public Service of Canada
  • Ann Decter  Director, Advocacy and Public Policy, YWCA Canada

11:15 a.m.

Governor, Bank of Canada

Mark Carney

This is a test of public sector productivity. I'll try to meet it.

First, fiscal decisions are for the Minister of Finance, so we'll defer to him on those and not provide advice. We'll take those decisions as given and adjust monetary policy accordingly.

Second, we want to avoid, in the extreme, being in the situation of European governments, where the scale of fiscal austerity being required of a large number of countries is now materially affecting the growth outlook in those countries and, furthermore, is not yet having the effect on confidence.

I'll make the general point that the measures that have already been enacted by the Spanish and Italian governments are in the order of magnitude consistent with long-term fiscal sustainability in those economies--and here I refer to enacted measures, not announced, muted, or debated ones. Just as Canadians learned with difficulty in the 1990s, you don't get credit for announcing measures and passing the budget. You only get it when you actually implement them. Even then there's a lag. So the tough measures are taken. You're getting a slowing in those economies. You'll get further slowing because of these measures, but not the credit in terms of market confidence or market interest rates. That's an important point to recognize, and that's part of our dynamic there.

On crude and gas prices, I'm glad you raised that technical box. As you know, we're trying to draw out how the relationship between Canadian gas prices has changed from an historic one. One would usually have looked to WTI oil prices and a margin off those for Canadian gas prices. The fact is that WTI used to move quite tightly with Brent crude. Depending on where you live in Canada, are you getting refinery oil that's a blend of either Brent or WTI, or out in Alberta? It's a very different feedstock into the refineries. Because of supply constraints in the United States—which, in part, some pipelines might help alleviate—a bigger differential has grown between WTI and Brent. So even though WTI has come down, as we've all seen, Canadian gas prices have not come down as much as they historically would have. Some of it is margin expansion, which goes to your question, but a large part is this actual dynamic, which I hope is relatively well explained in the box.

On the balance of payments and the current account, we obviously watch this. The current account deficit has increased. A large part of it—not all of it but a large part—has been due to an increase in investment in imported machinery and equipment. So that is a good current account deficit. If you're going to have a current account deficit, you want to be importing investment machinery and equipment that will ultimately make your businesses more productive—and one expects to build exports over time to pay back that deficit over time. But it is something we watch, and we'll be happy to have further discussions on that in subsequent meetings.

Thank you.

November 1st, 2011 / 11:15 a.m.

Conservative

The Chair James Rajotte

Thank you very much, Mr. Julian.

I want to take the next round, Mr. Carney. I want to raise two issues with you.

First of all, obviously Canadians are well aware of the strength of our financial system and the strength of our financial institutions. Two of the main factors are our capital ratios and our leverage ratios in terms of the policies that we've adopted in Canada.

You mentioned the Basel III accord, and that there are going to be both higher quality and higher levels of capital. There have been international concerns, American concerns, raised about both, which I think you've responded to very well. In terms of some of the Canadian concerns that I'm hearing, the institutions here are not concerned about the level unless they're asked to do it on an asymmetrical basis. If other countries do not adopt the Basel III levels but Canadian institutions are forced to, how will that impact them? That's one concern.

The second is with respect to the quality. Frankly, they say they're at or near the required levels now, but they do have a concern in terms of whether what they have now in capital is of the same type of quality or how that will be impacted. That's an issue.

A second issue is with respect to core inflation and the 2% target. Most people I talk to do not quibble with the 1% to 3% range or the 2% midpoint, but some do raise concerns with respect to what is actually included in core inflation. Gasoline, natural gas, fuel oil, and mortgage interests are just a few of the variables that are not included in core inflation. So these people ask the question.

Obviously at the bank, you regularly debate what should be in core inflation and what should not. Could you give us some background as to whether you're looking at that specifically now with respect to your core inflation target, or is this something we should look at changing?

11:20 a.m.

Governor, Bank of Canada

Mark Carney

Thank you, Chair.

I'm going to answer the second part first and then ask Mr. Macklem to answer the question on the bank capital.

To be absolutely clear—and I'm glad you raised the question—the bank does not target core inflation. The bank's target is for total CPI inflation, which includes gasoline and all food prices. I hope that's absolutely clear.

We have a target of 2% total CPI inflation because that's the representative basket of what Canadians consume. That's what Canadian households have to go out and spend. Of course it would be folly to suggest that Canadians don't put gas in their cars, or eat, or any of these things. We have to achieve—and we have achieved over the target's lifetime, including over the course of the last five years—2% total CPI inflation through tough and easy times.

What we do use with core inflation, or the difference between core and total CPI, is that we take out the eight most volatile items from total CPI. What core inflation is useful for—it's reported by Stats Canada, and I referenced this in my opening remarks—along with a number of other measures, is as an operational guide for where total CPI inflation is going to be.

Take the example of gas prices. They spike up because of conflicts in the Middle East, supply constraints in the United States, and other factors. They spike up. They're at a high level. We're aware they're at an elevated level. But unless they continue to increase, it's not additional inflation. We have to take into account what's happened to gas prices in terms of Canadian incomes and activity. The better guide of where inflation's going to be one year out, or one and a half years out, tends to be measures like core inflation and other measures, such as mean standard deviation and weighted means, all of which we report.

Just to be clear, we do not target that and we would not recommend that.

11:20 a.m.

Conservative

The Chair James Rajotte

I appreciate that. That is a question we get often.

11:20 a.m.

Governor, Bank of Canada

Mark Carney

I'm glad you raised it because we need to be absolutely clear about it.

Mr. Macklem will answer the Basel question, please.

11:20 a.m.

Senior Deputy Governor, Bank of Canada

Tiff Macklem

The first part is also a very important question. Clearly, the first step was getting the new capital, the new liquidity, rules agreed to, including a limit on leverage. That's been done. Now emphasis is increasingly focused on implementation. Obviously, rules are only as good as their sound implementation. As you stressed, what's important is both the full implementation and the consistent implementation across jurisdictions. Let's face it, while we certainly think the rules before the crisis were inadequate, one of the problems was that even the rules that were in place were not being followed in all jurisdictions. We have to get to a world where there is consistent implementation across jurisdictions.

What are we doing about it? Through the Financial Stability Board, which is the coordinating mechanism, both the standards setters.... So in the case of capital and liquidity and leverage, it's the Basel committee. The Basel committee, together with the FSB, has recently put out a couple of documents outlining how this will be done. The Basel committee has put out a document that outlines how they will verify that countries are living up to their commitments, looking first at whether the rules in each country--in some countries it's legislation, in others it's through regulation--are fully consistent with the new Basel III standard. The second part is whether those rules are being implemented in a consistent fashion across jurisdictions. The key issue there is to make sure the risk weighting is being done on a consistent basis across jurisdictions.

The FSB--

11:25 a.m.

Conservative

The Chair James Rajotte

Unfortunately, my time is up, because I cut everyone else off. But if you want, you can briefly wrap up.

11:25 a.m.

Senior Deputy Governor, Bank of Canada

Tiff Macklem

I'll just say a few more words. The Financial Stability Board, as the coordinating mechanism, has put out a document describing how the FSB is going to work together with the standards setters to ensure rigorous implementation.

11:25 a.m.

Conservative

The Chair James Rajotte

Thank you very much for that.

We'll go to Mr. Goodale, please.

11:25 a.m.

Liberal

Ralph Goodale Wascana, SK

Thank you, Mr. Chairman.

I have two brief points, I hope. With respect to the European plan to deal with vulnerable countries like Greece and others, you mentioned earlier that the modalities, the details, are yet to come, and it will be probably after the G-20 meetings, not before. I wonder if you see any risk of slippage there, delays that would allow the problem to just go on into never-never land.

The second question is on a totally different topic. You have spoken frequently and very effectively about the need for trade diversification--and that's been discussed around the table today--especially into emerging markets, especially Asia. You've also on occasion spoken about the need for sustainable resource development, because perceived unsustainability is not only an environmental issue, it is also an economic and market access issue.

On that last point, is there anything directly within the purview of the bank that comes to bear on that issue, or is that purely a matter for government policy to deal with? Are there ways the bank can influence the long-term sustainability of Canadian resource development, or is it something that is entirely dependent upon government policy?

11:25 a.m.

Governor, Bank of Canada

Mark Carney

Thank you for that.

On the first question with respect to Europe, what we have said, and it's still relevant, is that we expect the measures to contain the situation, but there are clear downside risks to that assumption. When we first said that we didn't have the actual plan, but we expected to have something similar to what was announced. But we need the details and then, obviously, we need implementation. There are always risks around both those aspects.

I'll be slightly more specific. With respect, for example, to the recapitalization of the European banking system, where the objective is to raise the capital ratio of that banking system, we would advocate that a component of that be met through new capital, so that it is not all met through a reduction in assets. I say that because it's a reduction in assets that's going to intensify the pressures on financial conditions, not only in Europe but elsewhere in the world, and it's going to displace new credit creation in Europe and elsewhere as assets are sold. If there is a better opportunity for a financial institution to buy an asset out of a European bank rather than make a new loan, that's going to have an impact, for example in the United States, if it's a U.S. dollar asset. So we would put emphasis on at least a component being met through new capital. There are ways to do that relatively efficiently, including with contingent capital that would reduce the dilution of existing shareholders, given current trading levels.

So, yes, we're monitoring this closely and we're in close discussion with our European colleagues. There will be meetings later this week, through the week and early next week, as part of the normal course, in Basel and other places, but this will clearly be one of the issues there.

As to your question about sustainable resource use, it is a very important one. I would say that from the bank's perspective, these are issues that ultimately go to the medium- and longer-term potential growth of the economy, on which we have to take a very cold-eyed, objective view and adjust our perspective of where that potential growth can go, because that is ultimately one of the key determinants of how fast we can run the economy without generating inflationary pressures.

We have reduced our outlook for potential growth in the last couple of years. We have re-confirmed it in this projection. These issues will have an effect. It was referenced earlier. Both in Fort McMurray and Saskatchewan, you see some of the pressures that do come on when paces of development becomes too large.There are broader issues around this, though, which have to do with national balance sheets, and other issues that we don't have time to get into.

11:30 a.m.

Conservative

The Chair James Rajotte

Okay. Thank you very much, Mr. Goodale.

A final round by you, Ms. Glover, please.

11:30 a.m.

Conservative

Shelly Glover Saint Boniface, MB

Thank you Mr. Chair. I don't envy you your job having to cut these fine people off, but you may have to cut me off as well because I have lots to say.

From listening to the questions put forward by some of my colleagues across the way with regard to page 12, I want to make it very clear that on page 12 you cite a variety of reasons that may lead to a predicted recession in the euro area at the end of 2011. For whatever reason, some of my colleagues across the way want to selectively hear only a small portion of what is listed there, namely what you've said about austerity measures. Then they also offer an alternative perception and interpretation of what it means in terms of stimulus.

I'd like you to confirm, Mr. Governor, that we are not Europe, that we do not have the same pressures or the same situation, and neither do we have the same economic view as the rest of the world. We are seen as leaders economically in the world, of course.

I'd like you to be very clear about what may cause the brief recession you are predicting for Europe, and then talk about stimulus in Canada, which is a whole other bowl of wax. TD Economics had said very clearly that stimulus spending right now is not a good idea. They have said, and I say the same thing, that timing is everything. We need to be very cautious right now in Canada.

What would the consequences be of prolonged deficit spending here in Canada? Again, it's a very different situation here from that in Europe.

So please clarify the first issue and then explain what the consequences would be of the second.

11:30 a.m.

Governor, Bank of Canada

Mark Carney

To explain the difficult situation in Europe, one has to go back to the functioning of the European Monetary Union. In effect, a number of countries in the so-called periphery, although they are some of the affected countries--particularly Portugal, Greece, and Spain specifically--ran very large current account deficits within the monetary union. Part of the reason they ran those deficits is that the relative rise in unit labour costs in those countries was quite high, of the order of magnitude of 20% to 30% higher than at the Franco-German core of Europe.

So they lost a lot of competitiveness over the course of the first 10 years of monetary union, and the challenge that these economies face is to regain that competitiveness. This is not a good place to be in, but one of the advantages of a flexible exchange rate is that the exchange rate does some of the work for you in regaining that competitiveness. The other alternatives are large structural reforms to improve or build productivity and product in labour markets, and other aspects. They're the right things to do, but those take time to pay off—over the course of several years at least. And then second is to reduce wages. I don't mean stagnant wages, but outright reductions in wages so that unit labour costs come down, which, of course, in and of itself reduces demand and has a self-reinforcing aspect on any slowdown. That means a direct hit to confidence, and lower spending. And then, because of lower spending, higher unemployment, etc., will result.

That is the situation these economies find themselves in. The lower growth further worsens the fiscal positions of the countries, which forces additional austerity. Because they face budget constraints, the markets are only willing to lend them certain amounts of money, and that is amplifying the downturn. So you have more severe recessions in an increasing proportion of the eurozone, which in our opinion is now going to result in an overall recession in Europe.

11:30 a.m.

Conservative

Shelly Glover Saint Boniface, MB

So anyone who leaves this room stating that a recession in Europe is likely caused by governments not spending on stimulus is grossly misinformed and not understanding this situation. Am I correct?