Finance Committee on April 18th, 2023

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Thank you, Chair.

Governor, in the monetary policy report, there's a headline that says “Fiscal measures adding to the growth of domestic demand”. This is just a quick question: Is that a polite way of saying that it's adding to inflation?

[Tiff Macklem]

It's a polite way of saying it's adding to domestic demand. It's adding to growth in the economy. Government spending is running roughly in line with potential output. It is contributing to growth in the economy. It's not contributing to the slowing. As I said, we actually need some slowing in the economy to get inflation down.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Thank you.

I think that's one of the first times I've heard you relate the two—fiscal and monetary policy—together. Thank you for that.

I want to continue the questioning I had on the public service growing by 30%. I didn't get a full answer on that.

Consultants are getting up to $21.4 billion in the budget. It's growing. We know the labour market is tightening, as you said. Labour shortages are wreaking havoc all the way around, and it's costing more to hire people. We know there's going to be a lot more immigration coming in, but it's hypothetical to say that's going to cover the labour shortages we have in the country, because we don't know if it's actually going to solve anything. We do know it might cause a housing shortage and a problem with the housing market. That's for sure.

Would you agree that the public service expansion is making the tightening of the labour market worse?

[Tiff Macklem]

We don't target every sector. We look at the labour market overall. I'm just looking at a table in our monetary policy report. There are various public sectors in here, and what we see is that public—

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

I'm just asking because Ms. Rogers, in a previous answer, said that immigration would help solve that problem, but it doesn't seem that's what your answer is.

[Tiff Macklem]

Immigration will help.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

I think you're right about different sectors having different outcomes.

[Tiff Macklem]

Immigration will help ease pressures in the labour market, but as Ms. Rogers was outlining, if you have an economy that starts in excess demand and you add new labour, new workers add supply but also add demand because they need houses and they go shopping. If you start in excess demand and you add both supply and demand, you're still in excess demand. There's still some work for monetary policy to get that down. Higher immigration means that our economy overall can grow faster without creating inflationary pressure, but it doesn't by itself relieve the excess demand in the economy.

[Marilyn Gladu, Conservative, Sarnia—Lambton, ON]

Thank you.

I'm going to follow up on that. I want to talk about housing.

We know the government plans to bring over a million immigrants in—500,000 regular and the rest temporary foreign workers and students. Budget 2023 plans $1.5 billion to make 4,500 spaces available and another $4 billion for 100,000 spaces. We already don't have enough places to live. How inflationary do you expect the gap between those two plans to be?

[Tiff Macklem]

Very quickly, if you look at our own projections, the housing market has weakened considerably, largely reflecting the higher interest rates and to some extent the fact that as people came out of COVID, they didn't all want to stay home all of the time and got out a bit more. Certainly higher interest rates have had a pretty big dampening effect on housing.

Housing prices are coming down nationally. They're down about 15%. We do expect housing to remain subdued, but in the second half of the year we expect to see it probably start growing again. One of the reasons is exactly what you cited. We have higher rates of immigration, which provides sort of an underpinning of demand—

[Marilyn Gladu, Conservative, Sarnia—Lambton, ON]

It's another pressure.

[Tiff Macklem]

—and then it really gets back to the issue of supply.

[Marilyn Gladu, Conservative, Sarnia—Lambton, ON]

I have another question for you. You mentioned that wage growth is expected to be 4.5% and that economic growth is declining at the same time. I'm interested in your view on the labour negotiations that are going on across the country and how those are going to affect inflation and interest rates.

[Tiff Macklem]

You won't be surprised that we're not going to comment on individual labour negotiations. Those are between employers and their workers. What I will say—and I've been saying this, actually, for a good six months to businesses, to workers, to governments, to Canadians, to anybody who wants to listen—is that you should plan on inflation coming down. Inflation is coming down. It was 4.3% this morning. We think it's going to be 3% by the summer and 2.5% by the end of the year, so whatever kind of contract you're signing, you should be thinking inflation is coming down.

[Marilyn Gladu, Conservative, Sarnia—Lambton, ON]

That's excellent.

In terms of corporate pricing behaviours, is there anything you think the Government of Canada could do to incentivize the right behaviour to minimize inflationary pressure?

[Tiff Macklem]

There are certainly competition questions, and we're going to leave it to the Competition Bureau to look at issues of competition.

From our perspective, we need to get demand and supply into better balance, because as long as demand is running ahead of supply, it's too easy for companies to pass through higher price increases. They don't need to worry about losing customers.

We are watching corporate pricing behaviour closely. It is certainly beginning to normalize, but we're not back to normal yet. Our commitment is to restore price stability, because when you have price stability, competitive forces are stronger. If everybody is expecting inflation to be low and stable, when a business increases its prices, customers notice that and say, “I'm going to shop somewhere else.” Companies know that, so they become more hesitant to pass through big price increases. That gives you the reinforcing stability of competitive forces working. That is one of the reasons we have to get back to our target for inflation.

[Marilyn Gladu, Conservative, Sarnia—Lambton, ON]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Gladu, and welcome to our committee.

It's over to MP Baker.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thanks very much, Chair. I'm going to share my time with Mr. Beech.

Mr. Macklem and Ms. Rogers, thank you very much for being here again and for all of your hard work in trying to tackle what for most of my constituents has been their number one challenge and number one priority: the rising cost of living and the affordability challenge that comes with that. I thank you for your leadership and your work in that regard.

Governor, if I may, I'd like to start by summarizing for the folks watching at home who haven't been able to watch this entire hearing some key takeaways from what you've said. You can tell me if I'm misspeaking or mis-characterizing what you've said.

Inflation in Canada was at a high of about 8.1% this past summer. We're now, based on today's figures, at an annual inflation rate of around 4.3%. Your projection is that inflation will be 3% sometime this summer, 2.5% by the end of this year and reaching your target of 2% by the end of 2024.

On the unemployment rate, we're currently around a historic low of about 5%, and it's projected to stay low. Although it can vary a bit, you're not expecting large increases in unemployment.

In terms of wage growth, we're projecting that it will continue to be strong, at least for the short term, and you're projecting that the economy will continue to grow.

Is that a fair summary of some of the things you've said today?

[Tiff Macklem]

Yes. The only thing I would add, though, is that we need to see some moderation in wage growth. We need to see service prices come down for that inflation forecast to come true.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

One of the things I noted was that you used to be a board member at Scotiabank. Many years prior to that, I was a commercial banker at Scotiabank. I won't blame you for all the loans I proposed internally with the bank that were turned down for my clients, but I think as someone who has worked in risk management and knows so much about that field, you can appreciate, as I can appreciate as someone who tried to extend loans to clients, the impact that interest rates have on borrowing costs.

That's one of the things I get asked about a lot by my constituents in Etobicoke Centre—where are interest rates going? These are either homeowners or prospective homeowners looking to buy a home and thinking about their mortgage rates, or they're business owners looking to borrow money to invest in and grow their businesses.

What would you tell Canadians about where you expect interest rates to go?

[Tiff Macklem]

Well, that's always a tricky question, because we take one interest rate decision at a time, but we've raised rates. Over the last year, we raised rates very rapidly. For our last two decisions, we have held the policy rate at 4.5%. We're using this pause as an opportunity to assess whether we have raised interest rates enough to get inflation all the way back to target, so we can't rule out that interest rates may need to go higher to get inflation back to target.

The other thing to note, which we discussed in our recent deliberations, is the extent to which interest rates may need to stay higher for longer, depending on how quickly inflation comes down to the target. As we started the day, there certainly was some good news: Inflation is coming down. However, as I emphasized, to get it back to the 2% target, some more things need to happen. We are going to be watching those things closely.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you very much for that.

I will pass the rest of my time to Mr. Beech.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Baker.

Go ahead, MP Beech.

[Terry Beech, Liberal, Burnaby North—Seymour, BC]

Thank you, Mr. Chair.

Colleagues, out of respect for the governor, I will keep this relatively short. I've already given a heads-up to the critics of each party. I have asked the clerk to circulate notice for the following motion, which I have provided in both official languages. It reads:

That, should a Budget Implementation Act be tabled in the House, the committee commence a pre-study of said legislation, and that the committee invite officials to provide briefings on the contents of the bill as well as the Deputy Prime Minister and Minister of Finance.

This is for notice only. I do not intend to move the motion at this time.

On a related manner, I will remind all finance committee members of the technical briefing on the BIA that's taking place tonight. It should be fun.

If there's any time left over, Mr. Chair, I'm happy to pass the floor back to Mr. Baker.