Finance Committee on Feb. 1st, 2024

[Tiff Macklem]

So far, we've avoided a recession.

I will say that growth has been weak, but we needed that weak growth to let supply catch up with demand. We're very aware that it doesn't feel very good. As one of the previous members indicated, on a per capita basis, consumption is actually down. Canadians are really feeling this.

All I can say is that letting supply catch up with demand is relieving price pressures. That has brought inflation a long way down.

[Joanne Thompson, Liberal, St. John's East, NL]

Thank you.

On the same point, if you look at how far we've come since the COVID-19 pandemic, do you feel that we've indeed reached that soft landing?

[Tiff Macklem]

So far, yes, we have not had a recession. We don't think we need a recession. Our own forecast doesn't have a recession. It has what many people would call a “soft landing”. Certainly, we hope to see that we don't have a recession. As we get to later next year, we expect to see growth picking up.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Thompson.

Governor and members, we are moving into our third round. I'm looking at the time. We have just enough. We're going to have to hold a little tighter now to the timing.

We're starting with the Conservatives and MP Scheer.

You have five minutes.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

Thanks very much for coming.

In the previous few years, the Bank of Canada purchased hundreds of billions of dollars' worth of government bonds at what were then low interest rates. Now, interest rates have gone up. In your previous appearance before the committee, we talked about how that would put the Bank of Canada itself in a deficit position, since it has to pay out more in interest than it receives on those bonds as the interest rates go up.

Can you update the committee about the budgetary position of the Bank of Canada in terms of a surplus or deficit based on those bond holdings?

[Tiff Macklem]

Yes. I think the senior deputy governor has the numbers in front of her, so I'll turn to her.

[Carolyn Rogers]

Are you looking for bottom-line losses? Is that what you're asking?

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

How much are taxpayers on the hook for over the losses at the Bank of Canada?

[Carolyn Rogers]

Our losses or profits always roll up into the government's overall financial situation. Our losses are very much contingent on the path for interest rates, as you know.

We are estimating probably somewhere in the range of ultimately $6 billion at the end. As I said, it's very much contingent on interest rates.

We now have legislation that's been passed that lets us retain our earnings. Normally, at the end of every year, we remit whatever our earnings have been to the government. Once the assets that you describe roll off our balance sheets, we will be back in positive earnings, and that will fill that overall loss. Then we'll be back to remitting to government.

We expect to be back in a positive situation in about two years, and then we will continue remitting to government.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

Just to clarify, you said it was a $6-billion loss.

[Carolyn Rogers]

That's in total.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

That's in total, so the Bank of Canada is losing $6 billion. You talked about taking advantage of the new legislation that allows you to retain earnings, but that still has the effect that the bank will not be remitting dividends, for lack of a better word, to the government, so there is still a cost to the taxpayer.

[Carolyn Rogers]

Yes, there is, on a temporary basis. Prior to the quantitative easing, we would turn about $2-billion surplus over to the government per year, and we will get back there eventually, but there is a temporary period of time in which we have losses that will roll up. We expect to be back to remitting to the government in a positive situation.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

If you normally remitted about $2 billion per year and you're going to lose $6 billion this year, that's an $8-billion swing.

[Carolyn Rogers]

That is a total, but sure, yes.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

If interest rates stay high, that could keep the bank in a deficit position for longer.

[Carolyn Rogers]

As I said, the loss is always an estimate because it's based on the yield on our bond portfolios, so it's sensitive to interest rates.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

That portfolio is government bonds.

[Carolyn Rogers]

Yes.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

It's not much of a portfolio in the traditional sense; it's just one type of holding.

[Carolyn Rogers]

It's one issuer, yes.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

If interest rates go up, do you have a contingency plan? Have you done any estimations, if you do have to raise interest rates, of what that might do to your bond holdings and the deficit position?

[Carolyn Rogers]

We run a sensitivity analysis regularly. Our finance team is quite separate from our policy-setting team. Like any other organization, we'll run a sensitivity analysis on our portfolio.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

Thanks very much for that explanation.

Mr. Macklem, you've talked before about government economic policy or fiscal policy, as I think you call it, being at cross purposes to monetary policy. We saw in the last few months of the year, as the year closed out, that the government's deficits over the last couple of years have been much higher than was originally anticipated. If that happens again, what impact will that have on your ability to lower interest rates in the short or medium term?

[Tiff Macklem]

I can't really add much to what I've already said. We've built the government's spending plans into our forecast. If governments of all levels—federal, provincial, municipal—add a lot more spending relative to what we've built in, then yes, that is going to make it harder to get inflation back down.