Finance Committee on May 1st, 2007

[David Dodge]

Let me take them very quickly in reverse order.

As I said, there is substantial day-to-day and week-to-week volatility in the dollar. You are right, we are above the range that we did our projections on, and we'll just have to see as we come to the next time what sort of trading range we have. We are above what we had assumed, and we will take that into account next time, if we stay there.

On the environmental side, we have no expertise in this. Let's be quite clear. The only expertise we have is in the financial mechanisms that might be used to facilitate whatever measures the government decides to take, and we are in the process of beginning to do some serious work on the issues of how emissions trading systems could actually work. The great importance there is the future price, because that's what really drives it. The great problem with the emissions system so far actually has been that there hasn't been a long enough futures market to actually make them work.

On the final issue, the money that was stolen from the museum, Paul, do you want to say a word on that?

[Paul Jenkins]

Very quickly, once that came to light, we took measures to investigate it thoroughly through our internal audit department. There were some internal controls that were not pursued leading to this theft, and I'm certainly satisfied that corrective measures have been taken to avoid that in the future.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Dykstra. Thank you, gentlemen.

We'll conclude with Mr. Thibault now.

[Robert Thibault, Liberal, West Nova, NS]

Mr. Chair, I want to speak to the establishment of interest rates, the interest rate policy.

I understand your principle that you want to keep inflation between 1% and 3%, and nobody would argue with that. What I would ask is, on the system and the considerations you make in establishing the interest rate, if you look at the current time, our rate is acceptable at 2.2% and you're looking at 2.7% over the short to medium term. That's our rate of inflation. But if we break it down across the country, your report shows that in Alberta there's a surge and it's at about 5%, and that's acceptable because we're coming in under 3% nationally. But if that same surge at 5% or 6% was in the Ontario market, our national rate would be heading above the 3% and would probably trigger an interest rate increase. So that action you're taking to cool down one region of the country can stifle or crush the other regions.

What do you take into consideration when making that type of decision?

[David Dodge]

We operate nationally. The weight of Alberta is roughly 12% nationally. The weight of Ontario is I guess about 43% or 44% nationally. So obviously, if indeed in Ontario or Quebec we had inflation going through the roof, it would necessitate much stronger action.

A good example would be 1988-89, when in fact there was actually a huge problem in central Canada and we had to take very vigorous action, you'll recall, back then.

This is a problem, and maybe on this we'll conclude, because there is no optimal currency area. Whether you're in Europe—because the Europeans have the same problem—whether you're in the United States, or whether you're in Canada, as long as you have, in essence, a continental entity that is very large and quite diverse, you are always going to have this. The real issue is to get movement in the relative prices and wages in the various areas. That's what's working.

Right now, we have inflation running at between 0.5% and 1% in the east and at around 5% in Alberta. That is encouraging movement of resources into those areas that need the resources, whether they be human or capital, and indeed we're getting the adjustment across the whole economy.

It's not easy. It's not easy at all. And it doesn't mean that everybody adjusts smoothly. There are always hiccups along the way. But the one thing that I think we collectively have learned over the last 30 or 40 years is that not to adjust is not an option. Failure to adjust means we all go down the tubes together, rather than rise together. So that's what's going on. It's not easy, but it is very beneficial to all of us over the longer haul.

[The Chair, Conservative, Brian Pallister]

Thank you very much, committee members, for a fruitful discussion of the monetary policy review of the Bank of Canada.

Thank you to our guests, Mr. Jenkins and Governor Dodge. We appreciate your being here again.

The meeting is adjourned.