Evidence of meeting #23 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was assets.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Mark Carney  Governor, Bank of Canada
Paul Jenkins  Senior Deputy Governor, Bank of Canada

3:30 p.m.

Conservative

The Chair Conservative James Rajotte

We call the 23rd meeting of the Standing Committee on Finance to order.

Per our orders today, we have the Governor of the Bank of Canada with us, Mr. Mark Carney, and the senior deputy governor, Mr. Paul Jenkins. Welcome to both of you, gentlemen. It's an honour to have you here today before the committee.

These are obviously very interesting times. We're certainly interested in hearing your perspective, the updated forecasts, and also about some very serious issues. All members do have a copy, of course, of your Monetary Policy Report, released, I believe, on Thursday.

Mr. Carney, welcome. You may give your opening statement, and then we'll go to questions from all members of the committee.

3:30 p.m.

Mark Carney Governor, Bank of Canada

Thank you very much, Chair.

Good afternoon, committee members.

Paul and I are very pleased to appear before this committee to discuss the bank's views on the economy and our monetary policy stance.

Before we take your questions, I would like to give you just a few of the highlights in that report the chair just referenced.

These are interesting, but also difficult, economic times, with the Canadian economy being buffeted by an intense and synchronized global recession. In recent months, the global recession has been exacerbated by delays in implementing measures to restore financial stability around the world. G-20 policy-makers are now responding to the global crisis with a renewed commitment to concrete initiatives and comprehensive plans. Our base-case projection is that these policies will be implemented in an effective and timely manner, and their impact will reach full force next year. The discussions in Washington over this past weekend were consistent with that outlook.

As a result of the current global economic and financial situation, the bank now projects that the Canadian recession will be deeper than we had projected in January. Our return to growth will be delayed by one quarter, to the end of 2009, and our recovery will be somewhat more gradual. In short, the broad outlines of the Canadian outlook are the same, but its profile has shifted.

Canada's real GDP is projected to decline by 3.0% this year, and growth is expected to resume in the autumn and accelerate to 2.5% in 2010, and 4.7% in 2011.

Our outlook for inflation is broadly consistent with that in our January Update. Total inflation will temporarily fall below zero in 2009, but core and total CPI inflation are expected to return to the Bank's 2% inflation target in the third quarter of 2011.

In that context, on Tuesday, the Bank lowered the policy interest rate by 1/4 of a percentage point to 1/4 per cent, which is judged to be the effective lower bound of the policy rate. Conditional on the outlook for inflation, the Bank has committed to holding this rate at 1/4 per cent until the end of June 2010.

Since December 2007, we have cut interest rates by a total of 425 basis points to their current historic lows—and to the lowest possible levels. It is the bank's judgment that this cumulative easing, together with the conditional commitment to keep rates low for a considerable period, is the appropriate monetary policy stance to move the economy back to full production capacity and to achieve the 2% inflation target.

However, these are uncertain times, and if additional stimulus were to become necessary, the bank retains considerable flexibility in the conduct of monetary policy at low interest rates. Because it is important to outline these alternatives in a principled and transparent fashion, we published a framework last week that describes the bank's approach to the conduct of monetary policy when the overnight interest rate is at its effective lower bound—as it is at this moment. We welcome the opportunity to discuss with this committee the possible application of that framework to achieve the inflation target.

Additional stimulus could be provided through quantitative easing, which involves the creation of central bank reserves to purchase financial assets, and/or credit easing, which includes outright purchases of private sector assets.

If the bank were to deploy either quantitative easing or credit easing, it would act in a deliberate and principled fashion. The focus of these operations would be to improve overall financial conditions in order to support aggregate demand and to achieve the inflation target. Asset purchases would be concentrated in maturity ranges in order to have the maximum impact on the economy. Actions would be taken in as broad and as neutral a manner as possible. And the bank would act prudently, mitigating risk to its balance sheet and managing its ultimate exit from such strategies at an appropriately measured pace.

Allow me to conclude with a few words on the outlook for the Canadian economy.

While there remains a high degree of certainty—particularly with the Canadian economy dependent on forces beyond our borders—we remain confident in the prospects of eventual economic recovery in Canada.

This recovery should be supported by the following factors: the gradual rebound in external demand; the end of stock adjustments in Canadian and U.S. residential housing; the strength of Canadian household, business and bank balance sheets; our relatively well functioning financial system and the gradual improvement in financial conditions in Canada; the past depreciation of the Canadian dollar; stimulative fiscal policy measures; the timeliness and scale of the Bank's monetary policy response.

With that, Mr. Chairman and members, Paul and I would now be very pleased to take your questions.

3:35 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you, Mr. Carney, for your opening statement.

We'll start with Mr. McCallum, for seven minutes, please.

3:35 p.m.

Liberal

John McCallum Liberal Markham—Unionville, ON

Well, thank you, Mr. Chair. Let me start by saying something nice, and that is I thought it was a very good move and a novel one—or at least novel to me—to announce in advance that your interest rate would stay low for a period of a year or so, thereby hopefully influencing market rates. I hadn't seen that before.

My question, however, concerns statements by Mr. Flaherty compared with your own statements today. Earlier this month in London, the Finance Minister said we had a mild recession and that inflation was likely to become a problem. On inflation, I will quote him:

I'm very conscious of...the danger of inflation. And we're going to watch closely over the next few quarters...and then we'll take the steps we have to take in conjunction with the Bank of Canada....

So he's saying mild recession and you're saying deeper than expected. He's saying there's a big inflation problem. You seem to say there isn't one—or at least that's my interpretation of your report.

So I have a double question. Isn't that quote by Mr. Flaherty a little bit proprietary on inflation, because I thought that was really your job? Second, who's right in this apparent contradiction between your view and that of the minister?

3:35 p.m.

Governor, Bank of Canada

Mark Carney

What was the nice bit?

3:35 p.m.

Voices

Oh, oh!

3:35 p.m.

Liberal

John McCallum Liberal Markham—Unionville, ON

The nice bit was the first bit about the low interest rate for a year.

3:35 p.m.

Governor, Bank of Canada

Mark Carney

Yes, thank you for mentioning that. Just to re-emphasize that point, we did see an important move in interest rates further out the yield curve as a result of that commitment, which should provide considerable additional stimulus to the economy.

In terms of the inflation outlook, I will speak only to our outlook on inflation. We do see an easing of headline inflation, and in fact we see headline inflation becoming negative in the second and third quarters of this year. Part of that will be driven by the unwinding of commodity prices, or the year-end effect of high energy prices this time last year. But it also reflects an easing of core inflation. We see core inflation coming down towards the bottom of the band over the balance of this year. This reflects the gap opening up in the economy between the potential of the economy and the actual output.

We are taking steps to provide stimulus to bring inflation back to target over the policy horizon, and we do see it coming back to the 2% target, both core and total inflation, by the third quarter of 2011.

3:40 p.m.

Liberal

John McCallum Liberal Markham—Unionville, ON

What about the part about the proprietary statement?

3:40 p.m.

Governor, Bank of Canada

Mark Carney

I think it's the Bank of Canada's mandate to achieve the inflation target and to conduct monetary policy to achieve the inflation target. I will say that in a situation where we are at the effective lower bound, as we are today, there is a need for even heightened communication and at times coordination with the government, depending on what non-conventional steps might be appropriate given the potential credit and market risk implications of those steps—if we were to follow them. So there is an element, as you know, first of communication, which is always the case, and then potentially of coordination in these circumstances.

Thank you.

3:40 p.m.

Liberal

John McCallum Liberal Markham—Unionville, ON

Thank you.

3:40 p.m.

Paul Jenkins Senior Deputy Governor, Bank of Canada

If I might add a quick comment on your very first observation regarding the statement to keep interest rates low for the period out to June 2010, it is a conditional commitment based on the projection of inflation—and that is important. But you're absolutely right that the objective of that statement is to influence interest rates further out the yield curve to have stimulative impact on the economy.

3:40 p.m.

Liberal

John McCallum Liberal Markham—Unionville, ON

That was the nice part of my comment, which I thought was a really good move.

The last time you were here I said you were out on an optimistic limb, but I think I've been fair in saying it was always conditional on the U.S. fixing the banks fairly quickly, and were that not to happen we'd do worse. I think that has happened. I'm not sure of the exact number, but according to the IMF there's $4 trillion, or some unimaginable huge number, in U.S. bank loans. So I contend there's still a risk that the U.S. banking system will not fix itself quickly enough.

Do you agree with that proposition? What is the outlook, or what will they have to do to make it work? What will the evidence be? When and and how will we know whether this central problem in the world--the U.S. and European banking systems--is indeed fixing itself?

3:40 p.m.

Governor, Bank of Canada

Mark Carney

Your question is absolutely on point.

The IMF estimate, just for the record, is $4.1 trillion on assets spread globally, but a large proportion of those troubled assets, according to the IMF, is in the United Sates. So the problem still exists. For absolute clarity, it is still an underlying assumption of our current projection that there will be steady progress in stabilizing the U.S. banking system and therefore the global financial system.

What does the U.S. need to do? The first step will be taken on Monday, May 4, with the results of the stress tests that have been conducted on the 19 largest banks--three-quarters of U.S. banking assets. We will look for conservative assumptions in both the economic outlook, which we understand, and the application to losses and capital requirements, which is part of the methodology. We have confidence that that will be the case, but it's short enough in the horizon; we need to see the results.

Then the institutions themselves will need to move forward with raising capital, either through the public sector or on their own. That's another leg of it. That will take some time. Very important is the need to separate the troubled assets, toxic assets, and legacy assets from the institutions. As you are no doubt aware, there is a series of mechanisms to do that involving private capital and public leverage. Those transactions also need to happen in a fairly expeditious fashion.

The last thing to be said is we need stabilization, not just in the U.S. but globally. We need different designs but similar effective steps to recap and separate assets, in order to continue to proceed in the United Kingdom and Europe.

3:40 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you.

Thank you, Mr. McCallum.

We'll go to Mr. Laforest.

3:40 p.m.

Bloc

Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC

Thank you, Mr. Chairman.

Good afternoon, Mr. Carney and Mr. Jenkins.

Mr. Carney, in recent months, the Bank of Canada has granted significant credit facilities and fund advances to banks in general so that they can better restructure or organize with regard to credit.

Are there any conditions associated with this assistance such as, for example, ensuring that access to credit is facilitated as well—we understand that it is for the banks—for businesses and individuals in general? Is that part of the process, conditions associated with that?

3:45 p.m.

Governor, Bank of Canada

Mark Carney

Thank you.

In late fiscal 2008, the Bank of Canada provided a maximum of approximately $40 billion to the Canadian financial system in the form of exceptional liquidity. Now the amount of that liquidity is approximately $26 billion. So there has been a significant drop, but that's nevertheless a large amount. Providing liquidity was and still is very important for the proper operation of Canada's financial system.

The purpose of our efforts is to improve overall financial conditions in Canada. We have provided liquidity and we are now providing liquidity to keep participants in the financial system. That isn't just the banks, but organizations such as the Caisse centrale Desjardins as well. This system includes all members of the LVTS. We are finding the results of these transactions encouraging. Currently, the Canadian financial system as a whole is doing better than those of the other industrialized countries.

3:45 p.m.

Bloc

Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC

You are providing the means to the banks and to the caisses Desjardins, whether it be for businesses in the various regions or for individuals who take out loans. I would like to know whether you are sure of setting conditions for those institutions. You've granted them $40 billion, but they have to be accountable to you in one way or another.

3:45 p.m.

Governor, Bank of Canada

Mark Carney

First, in the money and capital markets, the banks and caisses centrales are continuing to provide their liquidity or to transmit that of the Bank of Canada to the markets. That's absolutely crucial in the case of commercial paper, for example, and for other commercial bonds. The fact remains that, in Canada, credit growth, whether it be for households or businesses, is higher than in the other major countries. Our operations are one of the aspects on which this initiative is based. As to whether conditions have been formally set, the answer is no.

3:45 p.m.

Bloc

Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC

That answers my question. I believe you should have set some, however. It seems to me that the purpose, in a way, is to help citizens and businesses.

I would also like to know whether the banks have used those credit facilities and, if so, to what extent. You mentioned $40 billion. However, we heard that some banks had preferred not to use the funds put at their disposal by the Bank of Canada so as not to have to be accountable to the government. Is that the case?

3:50 p.m.

Governor, Bank of Canada

Mark Carney

The entire amount was used by the banks and the caisses centrales. I would like to clarify some points. First, those transactions are subject to a guarantee. Moreover, with respect to monetary and capital markets, we closely monitor the banks' transactions. We frequently speak with the bank presidents about this matter.

3:50 p.m.

Bloc

Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC

How do we know your predictions are correct this time? In September, you hadn't anticipated such a significant recession. In January, you were still very optimistic and now you are less so. How do we know you're on target this time?

3:50 p.m.

Governor, Bank of Canada

Mark Carney

How much time do I have left?

3:50 p.m.

Conservative

The Chair Conservative James Rajotte

You have 30 seconds.

3:50 p.m.

Governor, Bank of Canada

Mark Carney

I thought Mr. Mulcair would ask me that question very elegantly.

With your permission, to go more quickly, I'm going to answer in English.

What is different?

The first point is that our projection is similar to our projection in January. The recovery has moved out by a quarter and the profile of that recovery has flattened a bit, but not that much. In January we said we felt there would be a relatively modest recovery into 2010, and it still holds, but it's just flattened a bit more. Why has it flattened more? It's flattened because of the delay we discussed a moment ago on the stabilization of the financial system. It's also flattened because commodity prices, our terms of trade, have fallen off quite dramatically, and that will have a real income effect on Canada. It reflects a more muted outlook, a weaker recovery, and in fact basically no recovery in Europe in 2010.