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.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
It will be to buy inventory from somebody's...it won't be to buy cars.
Governor, Bank of Canada
No, and we also wouldn't buy.... I should have corrected that. There was a question earlier with reference to equities. That would not be the intent.
Part and parcel of that, though, as you say, is the creation of new central bank money. So the first channel is to purchase the securities, improve overall financial conditions, improve activity output, and reach the inflation target. The other channel, though, is that this is financed by the creation of new central bank money. And that has an impact on output and inflation that is less strong, in our judgment. One just looks to the experience of Japan in the 1990s as the classic example of this. The whole focus, or the preponderant focus of policy, was the creation of money--the liability side of the central bank balance sheet--as opposed to the purchase of assets, which is the asset side of the balance sheet.
We need to be prudent, deliberate, and careful about that second channel, though, because when confidence starts to return, when growth starts to return.... There is always a relationship between reserve money, very narrow money, and broad monetary aggregates, nominal demand, in an economy. When you're in a situation at the zero lower bound, the experience has been that the relationship is very, very weak. But as you start to recover, that relationship will reassert. So you need an exit strategy. You need a way to unwind it, and you need to be disciplined in the amount you pursue this strategy.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
If you were to choose the latter, meaning increasing the liability side when you did print the money, wouldn't that make more sense? Then you would let the market forces determine where the money is best needed. Or would you already know just by buying the assets, by the Bank of Canada buying the assets itself?
Governor, Bank of Canada
We have to do something with the liabilities. You have to do both. It's not either/or. Both of them happen at the same time. You create a liability. The question is what you do with the assets. Do you do it on a very short-term basis, or do you...?
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
The question is whether the bank determines that or whether you should let market forces in. The market forces could even be the banks or your customers, whoever it would be.
Governor, Bank of Canada
There are two issues here. One is that if you look at the government curve, the government bond curve, the bank would have to make a decision about what maturity on that curve would have the biggest implication for overall financial conditions and activity in the economy. As we've adjusted the overnight rate, and as we've put a conditional commitment on that overnight rate now, we've affected that curve. The question is whether we try to affect other aspects of that curve, not just to affect the level there but also to improve overall conditions. That's the first point.
The second point, and we try to be quite clear in the annex to the framework, is that if it were desirable--that's a big if--to purchase private assets, it would be limited to situations in which it would have a big macroeconomic impact, again, but also in which there was evidence of clear market failure. So the idea of letting the market solve the market failure is not there.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
It's not black and white.
Just quickly, has anybody printed money? The United States has, right?
Governor, Bank of Canada
Yes, the central banks that are pursuing both quantitative and credit easing at present are the Federal Reserve, the Bank of England, the Swiss National Bank, and the Bank of Japan. They are all pursuing both strategies at the current time.
Governor, Bank of Canada
Europe has.... It depends on your definition. I think, strictly, in terms of the definition of the European Central Bank, that it has not yet pursued that.
Conservative
Conservative
Mike Wallace Conservative Burlington, ON
Thank you, Mr. Chair.
I really appreciate the time you've put in here today, Mr. Carney and Mr. Jenkins. It's not often that we get you for two hours after a five-minute speech from you, which is great. It gives us lots of time to ask questions.
To follow up on where I was on the estimated pressures on capacity of the economy, in your statement you talk about the labour issues, so I'm going to focus on the labour part. You're saying, if I understand you correctly, that the labour shortages that had been appearing before, that you had been looking at in your surveys, have now disappeared. I don't know if it says that they've disappeared or that the labour shortages are smaller. Are there still labour shortages? Are you still hearing that? That's my first question.
Then, what's the issue for us, from a capacity perspective, coming out of this?
Senior Deputy Governor, Bank of Canada
Certainly from our business outlook surveys across the country, it's fairly clear that the companies we've surveyed have moved from a position of looking for labour, i.e. a shortage of skilled labour, to a situation where there is an excess. From that point of view, coming back to your very first observation, we talk about it in terms of the overall size of what we call the “output gap”. So the economy is working below its potential.
Conservative
Mike Wallace Conservative Burlington, ON
Then, in your next sentence, you say, “In contrast, the 12-month change in the average hourly earnings of permanent workers, reported by Statistics Canada”...showed strength. When you say it showed strength, does that mean it stayed steady, went up? What are the implications to that being the way it is?
Senior Deputy Governor, Bank of Canada
In general terms, the numbers, in terms of average hourly wage increases you get from Statistics Canada, are still growing at a rate of around 3% or 3.5%. Given the increase in unemployment, one would have thought you might have seen some of those wage increases coming down from where they had been. That was something we felt was worth noting in the report.
Conservative
Mike Wallace Conservative Burlington, ON
Does that affect our potential in terms of getting back to where the economy is working at full speed?
Senior Deputy Governor, Bank of Canada
No. In the context of the overall framework for monetary policy, one of the real advantages of our inflation-targeting framework is that we are forward looking. Therefore, when you see an output gap of the size we're currently facing in Canada, it is for that reason that we've eased monetary policy, the cumulative easing of 425 basis points since December 2007, and the conditional statement, providing quite a bit of stimulus to get the economy moving forward again.
Conservative
Mike Wallace Conservative Burlington, ON
Oh, good.
I need you to explain something in layman's terms. In your annex, you do a nice job on....
We're at, what, 25 basis points right now, or whatever the overnight interest rate is?
Conservative
Mike Wallace Conservative Burlington, ON
Okay.
You say there's a danger of going to zero. Can you explain what the actual danger of going to zero is? What would that do to the economy?
Governor, Bank of Canada
The issue, if I may, with the effective lower bound is that there are a variety of shorter-term money markets or financial markets, and it would be very difficult for them to function at that level, because there are transaction costs associated with operating those markets, and the actual net return from those transactions.... As soon as the transaction costs are positive, and if the net yield is close enough to zero, then those markets will cease to function. One way to think about it is that there are certain fees associated with money market funds, so what is the yield they're getting on the underlying securities and do they cover the operating costs of those fees?
We thought long and hard about where the effective lower bound was in Canada. Our judgment--and it's been validated, I think--was that we could bring rates down to 25 basis points and we could hold that so Canadians would get all the stimulus they deserve, if you will, given the situation, and that markets would continue to function well. And that has been the case in Canada.
This level is different in different financial systems. In the U.K., the judgment is that the effective lower bound is 0.5%. In the U.S., they are oscillating between zero and 0.25%. In Japan, they've pushed it all the way down to 0.10%.
So it varies by economy or by system, but we look at a host of those financial markets, and that's why we stopped where we did.
Conservative
The Chair Conservative James Rajotte
Okay. Thank you, Mr. Wallace.
We have time, I believe, for three short rounds, if we can make them brief.
We'll have Mr. Mulcair, Monsieur Carrier, and Mr. Kramp.
Mr. Mulcair.