Evidence of meeting #112 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was spending.
A video is available from Parliament.
4:25 p.m.
Governor, Bank of Canada
I think the senior deputy governor made those comments.
4:25 p.m.
Senior Deputy Governor, Bank of Canada
What we mean by a structural supply problem is that demand has run well ahead of the supply of housing and continues to. As the governor said earlier, that's a problem that has been around for at least a decade. I think it was exacerbated through the COVID crisis when we were all spending more time in our houses and wanting more house or to relocate, so we saw a really extreme run-up in prices.
4:25 p.m.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
To be clear, though, there are a number of factors that can go into a structural shortage of housing supply. One of those factors would be high interest rates, right?
4:25 p.m.
Senior Deputy Governor, Bank of Canada
That would be one, yes. Others would be zoning problems, labour shortages, supply costs, etc.
4:25 p.m.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
Thank you for that.
One of the things, though, that I want to home in on with you when it comes to this correlation is that you did say that you would expect housing prices to decline if interest rates went up, but that isn't happening, and it's because of the structural supply issue.
I'm curious about your thoughts as to what will happen to housing prices as you start to lower rates, given the inelasticity of supply, the structural problem in getting housing built in this country. What do you think will happen?
4:25 p.m.
Senior Deputy Governor, Bank of Canada
All things being equal, I think that we might see a bit of an uptick in housing demand again.
As the governor said, we're really pleased to see the coordinated effort across multiple levels of government to try to address some of the supply issues. Again, it's more than interest rates that will need to change to solve the housing shortage.
4:30 p.m.
Governor, Bank of Canada
I have to add that we know what happened when we did lower rates to emergency low levels during the pandemic: Housing prices went up 50% in two years. Part of that was that everybody was at home all day and wanted a bigger house. However, partly it was that interest rates were at emergency low levels and that the cost of financing was low.
We don't predict every asset price or every price in the economy, but yes, what that points out is that we had a supply problem at low interest rates and that we have a supply problem at high interest rates.
Obviously, interest rates have a big impact on the housing sector—it's very interest-sensitive—but we're not going to solve the housing shortage with interest rates.
4:30 p.m.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
I'm going to ask you this question.
It's not really an esoteric discussion. You probably saw the headline in the National Post today: “'Payment shock' coming for most Canadians with mortgages, RBC says”. It continues, “By 2026, when $400-billion worth of mortgages are set to renew, increase in monthly payments could be as high as 48%”. The article goes on to say that by 2025, “credit losses will inevitably rise”. This is affecting real people in real time.
One of the things I want to ask you is this: Let's say that you determine that market factors are sufficient to start bringing rates down at some point. Would you wait until a monetary policy report, a quarterly report, was coming out, or would you act earlier, as soon as that information came to your attention?
4:30 p.m.
Governor, Bank of Canada
Normally, unless there's a very immediate emergency, we act on our fixed action dates, which are eight times per year. Four of those times we have a monetary policy report.
We've demonstrated consistently that we can change interest rates at meetings without a monetary policy report, so yes.
4:30 p.m.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
That's great to know.
I have one last question in the 20 seconds I have left. Last week we had Robert Asselin here. He said something very interesting. He said that economic growth is very weak, at below 1%, and that low growth in a high-interest-rate environment will make social programs unsustainable.
Do you think he has a good point there?
4:30 p.m.
Governor, Bank of Canada
Lower growth and higher interest rates will certainly have an impact on the government's budget. I don't think fiscal policy in Canada is in a situation that makes social programs unsustainable. However, I do think protecting our very good fiscal position is important. It's important for social programs. It's important for the prosperity of the country.
4:30 p.m.
Liberal
The Chair Liberal Peter Fonseca
Thank you.
Thank you, MP Morantz.
Members, these mikes are very sensitive, so let's be careful not to touch them with anything, because doing that does affect the interpreters.
We will now go over to MP Baker for five minutes. Go ahead, please.
4:30 p.m.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
Thanks very much, Mr. Chair.
Governor Macklem and Senior Deputy Governor Rogers, thank you for being back here at the finance committee.
As I told you when we spoke just before the committee began, I represent a community called Etobicoke Centre, which is a suburban community on the western side of the city of Toronto.
This summer in particular I spent a lot of time knocking on doors and talking to folks in the community. I asked them how I can help and what their challenges are. One of the things I heard from them a lot was that a lot of them have mortgages. Some of the folks have variable-rate mortgages, and their rates have gone up. Some of them have fixed-rate mortgages that are coming up for renewal.
The question I got a lot from folks was, “When are my interest rates going to come down?”
That's my question to you on behalf of my constituents. What would you tell my constituents about when interest rates will come down?
4:30 p.m.
Senior Deputy Governor, Bank of Canada
I think your constituents are a lot like most Canadians. That's a question on the minds of many Canadians, particularly Canadians who are carrying mortgages, so about 35% or 38% of Canadians.
The short answer is that we need inflation to come down, and then we will be able to bring interest rates down. We have, in our forecast, outlined when we think inflation will come back to the target level.
As the governor was just saying, monetary policy is forward-looking, so we don't need to wait until inflation's all the way back to 2%. If we get signs that let us know we can be confident that inflation is coming down and that it will remain down, we will start thinking about lowering interest rates. We're just not there yet.
The governing council has not started talking about when we will reduce interest rates. We don't want to put false precision on it either. We would love to give Canadians an exact date. We would love to be surprised and to find out that we were too pessimistic and that we will be able to bring rates down sooner. We look forward as much as other Canadians do to getting interest rates back to a more neutral level. Right now our priority is to get inflation down.
4:35 p.m.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
I appreciate that.
I have a couple questions left and only about two and a half minutes, so I'll ask you to be as concise as you possibly can.
More or less, in your forecast, when do you expect inflation to come down to normal levels so that interest rates can start coming down?
4:35 p.m.
Senior Deputy Governor, Bank of Canada
We have inflation coming basically back to target towards the end of 2025. As I said, the monetary policy is forward-looking, so we don't need inflation to come all the way back to the target level. However, we need to be confident that it's on its way to being sustainably back to its target.
4:35 p.m.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
I appreciate that. That's helpful, I think, to my constituents. It gives them a sense of what you're looking at and what you are forecasting.
One debate that rages here in Parliament, which a lot of my constituents ask me about, frankly, is about what caused prices to go up so high. Why are prices so high?
Could you speak to what has caused prices over the last couple of years or so to rise so much?
4:35 p.m.
Governor, Bank of Canada
Look, you don't get to 8% inflation because one thing went wrong. It's a combination. My response to an earlier question reflected both global factors and domestic factors.
There are two things that really stand out. One is that almost every country around the world saw a big surge of inflation coming out of COVID. Every major advanced country did and certainly every G7 country did. That really reflected the fact that in all of our countries, as we got vaccines and came out of COVID, demand recovered much more rapidly than supply.
When demand runs well ahead of supply, two things happen. You can't get the things you want to buy, and that's what Canadians saw. You want to buy something, but it's not available, so you're put on a long waiting list. When that happens, pretty soon businesses start raising prices. We saw this surge of inflation around the world. As I said, that affected global prices, which spilled into Canada, and similar things were also happening here in Canada that reflected the prices that were more determined in Canada.
Central banks around the world have raised rates rapidly to slow demand and let supply catch up, and it's working. It's not working as quickly or as painlessly as everybody would like, but it is working. Inflation has come down quite a bit. We think there are further declines in the pipeline.
4:35 p.m.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
I appreciate that.
Could you quickly list some of those key global factors that have driven prices to go so high over the last couple of years?
4:35 p.m.
Governor, Bank of Canada
I would say that there are two main global factors. The first thing is that during COVID, we couldn't buy many of the services we wanted. We couldn't go to a restaurant, we couldn't go on a holiday and we couldn't go to the gym. People tended to substitute goods for services. If you couldn't go to the gym, you bought home exercise equipment, but of course, that had to be manufactured and it had to be shipped. All of a sudden, the pressure on the whole goods sector was very high. At the same time that manufacturing operations and transportation were struggling, people were getting COVID, there were lockdowns, there were restrictions and work was not as efficient as normal. They were having trouble creating the supply, and demand was running well ahead.
The second big global factor was, of course, Russia's unprovoked invasion of Ukraine. Russia is a major oil exporter and natural gas exporter. It had a very big effect on global energy prices. It particularly affected Europe. We were somewhat insulated in North America, because our natural gas prices were not nearly as affected as Europe's were. Of course, Ukraine and Russia, to some extent, are also major wheat exporters. You saw a big surge in wheat prices.
If you look at what happened, the inflation experience started with more global factors. Those happened, and then we had more domestic factors. Our economy was overheated as people basically wanted to buy more stuff than the economy could produce.
4:35 p.m.
Liberal
The Chair Liberal Peter Fonseca
Thank you, MP Baker and Governor.
We don't have time for everybody here to do a whole round. What we'll do here on this committee is split the time up evenly. It will be three minutes for each of the parties before we go into our health break. Then we'll come back, and we thank the governor for the time, to spend an hour on the housing study that we're doing. The focus will be on housing.
With that, I will go to MP Hallan for three minutes, please.
4:40 p.m.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
Thanks, Chair.
Governor, you, your predecessor David Dodge, and even the current finance minister, Chrystia Freeland have all said in your own ways that government spending increases demand above supply. In other words, it fuels inflation.
Since March of last year, you've had to raise the rates 10 times, from 0.25% to the 5% we see today. That's an 1,800% increase. The IMF has also warned that Canada's most at risk in the G7 for a mortgage default crisis. I want to know if that's something you're concerned about, as well as the default crisis.
4:40 p.m.
Governor, Bank of Canada
Our biggest concern—and we've been very clear on this—is that inflation is too high. Our biggest concern is that Canadians are struggling with affordability. It is creating anxiety. How are they going to pay their mortgage? How are they going to put food on the table? You've seen big increases in demand at food banks. It has to stop.
4:40 p.m.
Conservative