Finance Committee on April 30th, 2008

[The Chair, Conservative, Rob Merrifield]

I'm sorry, I did let you finish.

Mr. Wallace, you have five minutes now.

[Mike Wallace, Conservative, Burlington, ON]

Thank you for the time.

Maybe you can get back on the list, John, and get your question answered.

I have a couple of things. When I think of the Bank of Canada, and when most people on my street think about it, they think about the inflation rate and what you're doing to keep interest rates at such a level--moving them up and down--to control inflation. It's as simple as that. That's how they view it.

We've been talking about immigration at this committee, as part of the budget bill, and the issues in terms of labour shortages that may be coming to Canada in the future. Could you give me your view on the labour situation in Canada, short term or long term, and what that could do in terms of the cost of doing business, which then turns into the cost of the product, which then drives numbers up, which would reflect in the rate you would charge banks to loan money?

We're naturally concerned about the lack of replacement labour we're going to have and that we have to use the immigration system to find that replacement labour. I'm not sure if that will drive the price of labour up in the short term and long term. How big is that in the long view, and does that play a role in your thinking at the bank?

[Mark Carney]

It's a good question. I've said I'm not commenting on the specific legislation you referred to, but I'll just take it first from a medium-term perspective and reference something I tried to say earlier, which is that the contribution of labour supply--people working, but also hours worked--has been the dominant contributor to real GDP growth over the course of this decade.

We are in a situation, as I think everyone knows, in which the participation rate in our economy is at an historic high, unemployment is very near a 33-year low, and we also have demographic factors that are starting to impact. And as I said earlier, in order to maintain what has been the average growth rate--a little north of 3%--real growth rate over the course of the 15-year expansion we're in, productivity growth is going to have to accelerate markedly, because that labour supply is going to go from contributing about 1.6% a year, which has been the average, to about 1% by 2010. Our estimate, I believe, is 0.8% by 2015. So for 0.8% to contribute to 3%, you see where productivity has to shoot up.

Whether we can materially alter that profile is one of the questions. It will be difficult, but the factors that would change that profile would include encouraging and incentivizing older Canadians to work longer, continuing to enhance flexibility within the economy so people can move to jobs, and recognizing their training so that people remain able to move to jobs. Immigration has a potential role to play there as well. There are a variety of factors that have an impact on what is an important medium-term shift in labour supply in this economy.

[Mike Wallace, Conservative, Burlington, ON]

My next question is unrelated. I know you haven't had the job for very long, but you have for a little while. To be frank with you, I'm not familiar with how the central bank systems work in other countries, particularly the other countries of the G7, to which we belong.

I heard some comments you made about how, because of the way the legislation is written, there is less flexibility in some of your opportunities, from your perspective. Are there other jurisdictions in which the central bank act, or whatever they call it, or their system is doing things we should be doing here? Do you ever get an opportunity to make recommendations to us on legislative changes you would like to see in the banking system for the central bank?

[Mark Carney]

I would say--and I will go back to this issue--that this is the issue: our ability to conduct purchase and resale agreements. I know it sounds very dry and arcane, but we have less flexibility to provide liquidity in the system, at times of some stress but not extreme stress, than the ECB does or the Federal Reserve does in the provision of these types of operations.

I want to underscore a couple of things about these operations. First, as we've discussed--but I really think it needs to be emphasized--we take haircuts, so we give out less than the value, and that's to protect our balance sheet. Second, the way we conduct these is through auctions, so there is price discovery. It's competitive. People have to bid. Why is that valuable? First, we get the best price, obviously; but second, we learn a lot from these auctions in terms of what the conditions are.

As I think everybody around this table and in the financial markets is aware, some unusual things have been happening since August in the money markets and the term money markets. It's one thing to provide liquidity, but we also have to start isolating these problems and making sure they can be addressed better.

So if we are restricted, as we are today in terms of the range of debt instruments against which we can conduct these operations, we're restricted in terms of the amount of information we can glean and how effective we can be in addressing these problems.

To go back to where we started, with Mr. Mulcair on the cost to banks, these problems are raising the cost of funds for banks, and they're ultimately going to raise the cost of borrowing for Canadians.

[The Chair, Conservative, Rob Merrifield]

Okay. Time has gone.

I'm just going to remind the committee that we have four motions at the end of this committee.

Mr. Pacetti has a couple of quick questions, so Mr. Pacetti, the floor is yours.

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

I just want to quickly put this on the record, because there was a lot of talk about nominal and real GDP. The budget document says the impact of a one-year, one-percentage-point decrease in real GDP on federal revenues and expenses on the budgetary balance is $3.3 billion, and the present government is forecasting at $2.3 billion, so a 1% decrease in real GDP, according to the government document, would put the government into a deficit position. I just want to be on the record with that.

However, that is not my question. My question, just quickly, Mr. Carney, is this. The tendency or the trend for the Bank of Canada has been to lower interest rates by one-quarter point. The last couple of changes or decreases have been at a half, and one was at three-quarters, if I'm not mistaken.

[Mark Carney]

It was a half point and a half point.

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

It was a half point and a half point. Is that going to affect the market at all in terms of outlook? Are they going to be expecting all future increases or decreases at half percentage points? What is your outlook on that?

[Mark Carney]

It's a good question. The market should have no reason to make that inference that the size of change of interest rates by the bank would necessarily move from 25 to 50 basis points. We made adjustments there. As I said earlier, there were two major shocks to the global economy, which have implications for the Canadian economy. We have adjusted policy in the face of those shocks, front-loaded to extend that adjustment.

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

I'm worried only because we are tied to the U.S. and the U.S. has been doing it in big chunks as well, and I feel we're going to be forced to do whatever the Americans are doing. I just want to make sure that's not what is happening. If you can also—

[Mark Carney]

I'd like to respond to that.

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

Yes, I want you to respond also to my previous question, which we didn't have a chance to get to, but in the States, because of the lower rates, will that actually increase inflation, and will that further affect the recession they're in, or supposed recession? How is that going to affect them and, in turn, us?

[Mark Carney]

I'm not going to presume to give advice to the Federal Reserve or any other central bank. They certainly are focused on inflation and in fact have enhanced their accountability on that over the past year in terms of specific targets for individual members.

I want to underline a point, though. Over the course of time, Canadian rates have been 200 basis points higher, they have been 200 basis points lower than the U.S. rates, and they have been the same. During this cycle the U.S. has moved from 5.25% to today, to 2%, and the Bank of Canada has moved from 4.5% to today, to 3%. It matters what's happening in the U.S. economy. It matters what's happening in the global economy. We set interest rates in Canada for Canadian conditions and Canadian inflation.

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

I have just a quick question.

[The Chair, Conservative, Rob Merrifield]

Quickly.

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

On one of the questions you were replying to for Mr. McCallum when you were talking about the asset-backed instruments, I think you said some of the instruments were not properly labelled when they finally got to the retailer. I just want you to clarify that. I don't know if I fully understood what you were saying, but basically because the instruments were packaged and set up differently, retailers had a harder time either understanding or even taking action against whoever they were to take action against.

[The Chair, Conservative, Rob Merrifield]

Give a very quick answer. Go ahead.

[Mark Carney]

A very quick answer is that a vast majority of these non-bank asset-backed commercial paper programs had a very high degree of synthetic assets, which had a very large degree of embedded leverage that was not clear to investors and that created an effective subordination of those investors to the providers of that leverage. That's not clear, but that's the reality.

That's quick.

[The Chair, Conservative, Rob Merrifield]

Thank you very much. You have handled yourself extremely well. Thank you for your first visit to our committee as the Governor of the Bank of Canada. You give us a great amount of confidence in the job you are doing, and if you can keep inflation at 2%, as your predecessor has, that's a marvellous thing to achieve.

I want to thank you, on behalf of the committee, for coming to spend this amount of time with us today.

[Mike Wallace, Conservative, Burlington, ON]

Mr. Chair, as a point of order...it's not a point of order, but the governor mentioned that there are some legislative things they'd like to see happen. Is there a way that we can request them to provide this committee with the wording or the changes they would like to see, which could be debated sometime? He comes to tell us about it, and then we don't talk to him again for another year, and then he comes back and says the same thing. There might be an opportunity for us to look at what those issues are—

[Mark Carney]

As a point of clarification, certainly I welcome the offer, but the proposed changes in Bill C-50 are the alpha and omega of our—

[A voice]

We'll do that for you.

[Mike Wallace, Conservative, Burlington, ON]

I didn't know that. Thank you very much.

[The Chair, Conservative, Rob Merrifield]

Thank you very much, and thank you for coming in.

Now we will suspend for just one minute, and then we'll move on to our motions.

Thank you.