Evidence of meeting #56 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was dollar.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

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

11 a.m.

Conservative

The Chair Conservative James Rajotte

Good morning, ladies and gentlemen. Welcome to the 56th meeting of the Standing Committee on Finance.

The order of the day, pursuant to Standing Order 108(2), is a study on the report of the Bank of Canada on monetary policy.

We are very pleased to have with us this morning two witnesses from the Bank of Canada. We have the governor, Mark Carney—welcome, Mr. Carney, to the committee again—and we have the senior deputy governor, Mr. Paul Jenkins.

Mr. Carney, I understand you have an opening statement. Then you will have questions from all members. We look forward to your statement here at the committee. Thank you for coming.

11 a.m.

Mark Carney Governor of the Bank of Canada

Thank you, Chair. Thanks for having us.

Good morning, Mr. Chair and distinguished committee members.

Mr. Jenkins and I are pleased to appear before this committee today to discuss the Bank of Canada's views on the economy and our monetary policy stance. While conditions in the Canadian economy have improved since we met here in February and April, many of the basic challenges remain. I would like to give you some of the highlights from our Monetary Policy Report, released last week.

Recent indicators point to the start of a global recovery. Economic and financial developments have been somewhat more favourable than the Bank had expected in July, although significant fragilities remain.

In Canada, as expected, a recovery in economic activity is also underway, following three consecutive quarters of sharp contraction. This resumption of growth is supported by monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices, and stronger business and consumer confidence.

However, heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures. The Bank expects the current strength in the dollar, over time, to more than fully offset the favourable developments since July.

Given all these factors, the Bank now projects that, relative to our July Monetary Policy Report, the composition of aggregate demand will shift further towards final domestic demand and away from net exports.

The bank now expects growth to average slightly lower over the balance of the projection period. The bank projects that the Canadian economy will contract by 2.4% this year and then grow by 3% in 2010 and 3.3% in 2011. This projected recovery will be somewhat more modest than the average of previous cycles.

Total CPI inflation declined to a trough of minus 0.9% in the third quarter, reflecting large year-on-year drops in energy prices.

Total CPI inflation should rise to 1% this quarter, while the core rate of inflation is projected to reach its trough of 1.4% during the same period.

Owing to the substantial excess supply that has emerged in the economy, the bank expects both core and total inflation to return to the 2% target in the third quarter of 2011, one quarter later than we projected in July.

The main upside risks to inflation relate to the possibility of a stronger-than-anticipated recovery in the global economy and more robust Canadian domestic demand.

On the downside, the global recovery could be even more protracted than projected. In addition, a stronger-than-assumed Canadian dollar, driven by global portfolio movements out of U.S.-dollar assets, could act as a significant further drag on growth and put additional downward pressure on inflation.

Last Tuesday, the bank reaffirmed its conditional commitment to maintain its target for the overnight rate at the effective lower bound of one-quarter of 1% until the end of June 2010, in order to achieve the inflation target.

The bank retains considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework that we outlined in the April MPR.

Our focus in the conduct of monetary policy is on achieving the 2% inflation target. The exchange rate should be seen in this context. It is an important relative price, which the bank monitors closely. But what ultimately matters is the exchange rate's impact in conjunction with all other domestic and foreign factors on aggregate demand and inflation in Canada. To put it simply, the bank looks at everything through the prism of achieving our inflation target.

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

11:05 a.m.

Conservative

The Chair Conservative James Rajotte

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

We'll start with Mr. McCallum. You have seven minutes.

11:05 a.m.

Liberal

John McCallum Liberal Markham—Unionville, ON

Thank you, Mr. Chair, and welcome to both our witnesses.

Let me begin by saying, Mr. Carney, that I think you are doing a great job. I know I'm not alone in appreciating the frankness and directness of your language--at least in terms of the language of central bankers.

I would like to begin with the question of the high dollar. I remember from my academic times that there was a lot of discussion as to whether unsterilized intervention or sterilized intervention were terribly effective over the medium term, especially in a world where the whole world seems to think the U.S. dollar should go lower. If that is the world in which we live, I certainly support your efforts to keep the Canadian dollar from going too high, because of the damaging impact, as you say, on jobs and manufacturing, but I question whether, if it's the Bank of Canada against global tendencies, you have sufficient instruments.

That is my question.

11:05 a.m.

Governor of the Bank of Canada

Mark Carney

Thank you.

The first thing I would say, as I mentioned in my opening statement, is that what is important ultimately is that we have sufficient instruments to achieve our inflation target, and I would remind you—I know that you know this—that the objective of the Bank of Canada is to conduct, across the suite of policy options that we have, all those policies in order to achieve the 2% CPI inflation target. In that context, the exchange rate is an important factor.

To answer your question directly, history has shown that intervention in and of itself, without backing policy moves or policy moves that are consistent with the direction of that intervention, seldom is effective over the longer term. What we have underscored with the current situation with the Canadian dollar is that in the context of all other factors that are affecting aggregate demand and inflation in Canada, it is a downside risk. Recent movements have caused a shifting out by one quarter in the profile of when we will return to our inflation target, and within that context, the bank retains considerable options to provide additional stimulus, if it's required, in order to achieve that target.

11:05 a.m.

Liberal

John McCallum Liberal Markham—Unionville, ON

Maybe you don't want to reveal your arsenal publicly, but in addition to intervention, what other instruments would you consider for influencing the dollar if you perceive that it's going too high?

11:05 a.m.

Governor of the Bank of Canada

Mark Carney

Again, the instruments that we have are to achieve the inflation target. When we last met at this committee, in April, we had published a similar report, and the annex of that report detailed a strategy, our principles and our policy for unconventional monetary policy--policy of very low interest rates, which included options of credit easing or quantitative easing—and the conditional commitment that we have put into force.

So we have those options to provide additional stimulus, if it's required. And I'll remind you of the obvious, which is that at this stage we think the policies that we put forth, including the conditional commitment through June 2010, are consistent with achieving that inflation target over the reasonable horizon.

11:10 a.m.

Liberal

John McCallum Liberal Markham—Unionville, ON

Thank you.

My second question has to do with the concept of prudential macro-management, which I think you've spoken of quite frequently. My understanding is that at certain times in the past you've suggested that the Bank of Canada's mandate might go beyond inflation per se to include some kind of prudential macro-management of the economy, which would involve more direct activity vis-à-vis banks.

My question is double-barrelled.

Perhaps “power struggle” is not the right term, but how would you describe the current division of labour between OSFI, the Bank of Canada, and the Department of Finance, including the minister?

Second, there was an interesting editorial in The Globe and Mail this morning that said that maybe the Bank of Canada should have an expanded mandate--perhaps what you might call prudential macro-management--but should the Bank of Canada have an expanded mandate, there should be an opportunity for parliamentary debate because it might require some change in the Bank of Canada Act.

The double question: one, what is the current division of labour; and two, what do you think of parliamentary debate on the possibility of an expanded role for the Bank of Canada?

11:10 a.m.

Governor of the Bank of Canada

Mark Carney

With respect to the first part, the division of labour, I'll underscore what I said yesterday and what Paul Jenkins said earlier in another public speech about a month ago, consistent with the words of the Minister of Finance: the Minister of Finance has overall responsibility for the financial system. So overall responsibility rests with the Minister of Finance and, through the Minister of Finance, Parliament. So that's absolutely clear.

The second thing is that the current structure of regulation in Canada has a prudential regulator, bank regulator, insurance regulator, with OSFI, the Bank of Canada--which has a loosely defined or an imperfectly defined financial stability responsibility—and other agencies. And we work with provincial securities regulators, CDIC, OSFI, and the federal Department of Finance to ensure there aren't gaps. I think that level of cooperation and interaction, which has been somewhat ad hoc, has been very effective, because we do work very effectively together.

The crisis in other countries has thrown up the issue of how to best organize across various agencies these micro-responsibilities and these macro-responsibilities. Undoubtedly, different countries will have different solutions that will respect their regulatory histories, their successes, and their failures. Canada, obviously, has had successes. It is ultimately the decision of the minister and through Parliament, as appropriate, how to best organize the Canadian system, given our strengths, given our history. The bank will participate as appropriate in those discussions, in those decisions. I would underscore that the system in practice has worked very effectively during the course of this crisis and coming out of this crisis.

The last point is that we are working very closely with OSFI, with federal finance, and as appropriate, with provincial regulators on the redesign of regulations across the whole suite that's coming out of the G-20 process. Most of those decisions or those consensuses are being formed at an international level. So it is important that we work closely together, and we are doing that.

11:10 a.m.

Liberal

John McCallum Liberal Markham—Unionville, ON

Thank you very much.

11:10 a.m.

Conservative

The Chair Conservative James Rajotte

Thank you, Mr. McCallum.

Monsieur Laforest, s'il vous plaît.

11:10 a.m.

Bloc

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

Thank you, Mr. Chair.

Good morning, Mr. Carney and Mr. Jenkins.

Mr. Carney, yesterday, you delivered a speech to the Autorité des marchés financiers in Montreal.

The newspapers are carrying a summary of your speech. First, you said that you were a little skeptical of financial institutions. You said that they have to change their attitude. Second, you say: “Financial institutions need to demonstrate an awareness of their broader responsibilities.”

When I read that sentence, I was a little surprised. I was particularly struck by the word “broader”.

In your view, how have the responsibilities of financial institutions become broader than those they had before the crisis? What are you looking for from financial institutions in this context?

11:15 a.m.

Governor of the Bank of Canada

Mark Carney

Thank you for your question.

First, I would like to make it clear that my speech in Montreal yesterday was more for consumption outside our borders than inside Canada. To repeat, during the crisis, our financial institutions worked together in a spirit of close cooperation. They did so very effectively and in a way that served Canada well. That is my first point.

The second point is that, as with all financial institutions, in whatever country, the key, in my view and the view of the Bank of Canada, is that they must think in terms of the system and not merely of themselves. For example, a financial institution must consider the effect of its actions on financial stability. This is necessary because it is possible to change the institution's way of doing things.

11:15 a.m.

Bloc

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

That is summarized well in La Presse.

You say that financial institutions have broader responsibilities as if you mean new responsibilities. What responsibilities do they have now that they did not have before?

11:15 a.m.

Governor of the Bank of Canada

Mark Carney

It is not a matter of new responsibilities; the responsibilities are the same as they were before the crisis. If it is part of a system, a financial institution has a responsibility to that system.

I will finish my answer in English.

What was clear, internationally, was that a number of institutions did not behave in that fashion. They took advantage of the safety nets and conducted business on the presumption that support would come. This increased the risk.

Part of what is being done at the G-20 is to bring about changes in these attitudes through processes such as living wills and changes to markets that will make institutions think more of the system and act in accordance with it.

11:15 a.m.

Bloc

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

Fine.

Turning to the economic recovery, you are forecasting a 3% growth next year and a little more the following year. Just now, you said that the rapid rise in the Canadian dollar was putting economic growth at risk.

Do you feel that Quebec is more at risk than other Canadian provinces? Which provinces would be most affected if the Canadian dollar was more or less at par with the American dollar?

11:15 a.m.

Governor of the Bank of Canada

Mark Carney

We provide national projections, Canadian projections, but we do not provide projections for specific provinces. I can tell you that some sectors will be more affected. The manufacturing sector, for example, undergoes difficulties when the dollar is consistently strong or increasingly volatile.

11:15 a.m.

Bloc

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

Do you have ways to counter something like that? What steps you will you be taking if parity materializes?

11:15 a.m.

Governor of the Bank of Canada

Mark Carney

If parity...?

11:15 a.m.

Bloc

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

If we reach parity quickly.

11:20 a.m.

Paul Jenkins Senior Deputy Governor, Bank of Canada

Perhaps I can add something.

First, we can see that the Canadian economy has a number of things going for it. Commodity prices are a little higher in all regions. The level of business and household confidence is also higher than a year ago. With the gains in and the changes to financial conditions, wealth... There are positive things going on in all regions.

In our forecast, we noted that, if the dollar continues to be high, the effect will be to offset these positive elements. As the governor mentioned, monetary policy deals with the economy as a whole. We are focusing our objectives on inflation.

11:20 a.m.

Bloc

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

Is the present value of the dollar its actual value or is it affected by speculation to any extent? What do you currently see as the real value of the dollar?

11:20 a.m.

Governor of the Bank of Canada

Mark Carney

We never express an official opinion on the value of the dollar.

11:20 a.m.

Senior Deputy Governor, Bank of Canada

Paul Jenkins

It is only an assumption.

11:20 a.m.

Bloc

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

Thank you.