Finance Committee on Oct. 19th, 2006

[David Dodge]

In the middle term, the appreciation of the dollar slows down the rise in domestic prices, which helps us to deal with the situation. This means that we could loosen our monetary policy during periods of appreciation and tighten it up during depreciation periods.

Half a century of experience has taught us that a floating dollar is the best way to facilitate the adjustment of the economy. There are various monetary practices, but since 1950, we chose to have a floating dollar, and it has served us well.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Since 2003, from a macroeconomic point of view, how was the Canadian economy affected by the appreciation of the dollar?

[David Dodge]

Since 2003, the gap between interest rates in Canada and the United States has diminished. In the beginning, there was a gap of more than one percentage point. We had a higher rate than that of the United States, but as of now, it is lower or just about the same.

Thus, we can say that there is an interaction between monetary policy and exchange rates.

[The Chair, Conservative, Brian Pallister]

Merci, monsieur.

We continue with Mr. Del Mastro.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

Mr. Governor, I wanted to ask a question, first of all, with respect to interest rates. We have regions of the country, probably the west, where there is more inflation than in others, and in Ontario, I would argue, we don't see the inflation, the interest rates.... Certainly, if anything, we've seen energy prices come down a little bit. Commodities such as automobiles have actually come down in price, not gone up in price. Is there an opportunity here, moving forward, where we might see interest rates actually relax? That would also see a little lower dollar, which would also create more demand for Canadian-produced goods.

[David Dodge]

I'll be very quick here. The answer is yes, we do expect inflation to be below our target over the next period of time, for reasons we explained right at the beginning. We think we're on track to come back to about 2% nationally. That means the rate of inflation is a little higher in the two western provinces, a little lower in most of the rest of the country, but on average it is 2%.

Will there be a point at which interest rates will come down? There well could be. It goes back to the very first question Mr. McCallum asked. If indeed the economy ends slowing a lot more than we anticipate, then we will react.

[Dean Del Mastro, Conservative, Peterborough, ON]

Last week there was a report that Canada was actually expected to lead the G-8 growth over the next year. Is that consistent with your view?

[David Dodge]

I'm sorry, I didn't--

[Paul Jenkins]

I don't have all the details of growth rates across the G-8 countries, but certainly we are expecting Canada to be one of the better-performing economies among the G-8, based on the projection we presented in today's monetary policy report.

[Dean Del Mastro, Conservative, Peterborough, ON]

Okay.

What was the bank's position on the recent debt paydown announced a couple of weeks ago by Canada's government?

[David Dodge]

As I said earlier, in periods when revenues are a little stronger than anticipated, I think it's extraordinarily important to use that opportunity to pay down debt. That's how the system is supposed to work. Indeed the accounting rules mean that if you get more revenue, you don't spend it; you have to pay down debt.

It is important to take advantage of strong periods to do that. As I've said before, it's very important--important not only for the Government of Canada, but important in provinces where there is very large revenue growth--to take the opportunity to either pay down debt or put money aside for the future. That helps in the short run; it really helps in the long run.

[Dean Del Mastro, Conservative, Peterborough, ON]

That's great. Thank you.

Do I still have some time, Mr. Chair?

[The Chair, Conservative, Brian Pallister]

Yes.

[Dean Del Mastro, Conservative, Peterborough, ON]

Great.

I just wanted to ask you about the GST cut. When we announced the GST cut last spring, a lot of people were saying we were adding a stimulus to an overstimulated economy, and it would result in much higher levels of spending. We really didn't see this, though, did we? We didn't overstimulate an overstimulated economy, did we?

[David Dodge]

No, for us the issue is balance, the fiscal balance. Indeed last year, because it turned out that we had higher nominal income growth than we had expected, it was important that the government actually ran a bit larger surplus. That was unintended, and our job at the bank and the area in which we have to cooperate very closely with the governments--not just the Government of Canada but governments in Canada--is to have an understanding on the fiscal balance and what we're doing on our side.

We've been pretty successful since the early 1990s in that regard. I think the system works pretty well. The Government of Canada and the provinces, with whom I talk regularly, really do understand what each of us is trying to do.

[The Chair, Conservative, Brian Pallister]

Thank you, sir.

We'll move to Mr. Pacetti.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

Good afternoon, Mr. Dodge and Mr. Jenkins. It is always nice to have you.

I was just reading your opening comments. I might be repeating myself, but where do we go with this capacity? Last year you talked about how we appear to be operating at full production capacity; now you're saying we're operating just above capacity. I think some of my colleagues addressed the fact that we're not operating at capacity in some of the industries, as you stated yourself, such as in the forestry industry. In the forestry sector, we're having some problems with employment; it's the same with the automobile or manufacturing sector in central Canada. We seem to have good numbers coming only out of Alberta. There seems to be some declining. Is it just an aberration?

How do we determine, first of all, what is operating at full production capacity? If we are operating above capacity, how long can we continue operating above capacity?

[David Dodge]

Well, capacity here is not a kind of physical limit so much as an economic limit. Basically, capacity is the point at which, essentially, demand is outstripping supply enough that we're getting an upward movement in prices. That's essentially where we are; there's still a little bit of upward movement in prices.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

But when we talk about supply, is it goods and services supply or monetary supply?

[David Dodge]

No, no, goods and services.

[Paul Jenkins]

What's being produced in the economy.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Okay. So are we almost at our limit or a bit above our limit?

[David Dodge]

Well, look, there's always a structure--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

We can't produce more cars?

[David Dodge]

There's always a structure out there, and not every industry will be at capacity. Some will be over capacity, in the sense that they're producing inefficiently because they're having to use either machinery that's outdated or labour that hasn't fully got the skills, or whatever. So it's an economic concept, it's not—