Finance Committee on Feb. 12th, 2013

[Mark Carney]

We haven't recovered, but I caution you there a bit. The recession coincided with the start of the demographic adjustment, which, as this committee would know, is actually pretty severe over the course of the next decade. So you do get into those higher-age cohorts—the fifties—where there is just a lower employment rate, even though it has held up better than previous—

[Scott Brison, Liberal, Kings—Hants, NS]

But job creation has not kept up with the pace of the working-age population?

[Mark Carney]

Yes, we have slack in the labour market. The unemployment rate is higher than it was before. But, again, I think the spirit of the question was about how we have done relative to others, given the shock to demand that's happened globally, and it is quite distinct.

[Scott Brison, Liberal, Kings—Hants, NS]

This is just Ms. Glover and I working closer together to ensure that Canadians hear all of the truth on these matters. It's important that we cooperate.

You mentioned earlier an aboriginal and first nations issue, and this ties in with what you just said about the demographic shift. The youngest population and the fastest growing population is our aboriginal and first nations population—400,000 young aboriginals will be entering the workforce in the next 10 years. What does that kind of demographic shift mean potentially on the economic horizon for Canada, both if we get it right and if we don't get it right?

[The Chair, Conservative, James Rajotte]

Could you give just a brief response?

[Mark Carney]

It is extremely important from a social perspective, but also from an economic perspective, that this segment of our population is as fully integrated into the labour force as they wish to be. If not, we will have lower growth and poorer outcomes, not just for them but for the country as a whole.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Brison.

I'm just going to wrap up with a few questions. I know time marches on, and I know colleagues have many more questions. Perhaps in April we can have you two gentlemen for four hours, a lengthier session.

I have a few questions.

First of all, Governor Carney, in past MPRs you have always mentioned the U.S., Europe, and China. In this one you mentioned Japan. I don't know if you want to make any specific comments with respect to Japan, especially with respect to their exchange rate commitment.

[Mark Carney]

Thank you. That's a very important question.

Since our last MPR, there has been a major shift in the policy stance in Japan. There's been a fiscal expansion of a little more than two percentage points, and they have moved to a 2% inflation target. The monetary policy framework previously had a less than 2% inflation target. There has been some concern that, associated with those major, very positive developments in macro policy, Japanese authorities were targeting a certain level of the exchange rate. There have been discussions at the G-7 about this. I'm sure there will be discussions this weekend at the G-20. A statement has been released, which I referenced earlier, based on those discussions, and the crucial point that we make here in Canada—which the Japanese authorities have agreed to acknowledge—is that monetary policy is focused on domestic outcomes. So if you're focusing on the 2% inflation target, you're targeting that domestic outcome, not the exchange rate.

That said, monetary policy has consequences for the exchange rate, all other things being equal, and if monetary policy is looser and more accommodating than it was previously, as it will be in Japan, as it is in Japan, given that they have raised the target for inflation materially, that will have consequences for the exchange rate. But the important thing is to stay focused on the medium term. That's why, because of those major policy changes and because Japan is still the third-largest economy in the world, we highlighted more detail.

[The Chair, Conservative, James Rajotte]

I appreciate that.

The second item I want to touch on is household debt. It's an issue you have raised constantly, certainly at this committee. The linkage between, obviously, the overnight target rate.... The prime lending rate is somewhat linked to the overnight target rate. It's more obviously long-term than the overnight rate is. But with respect to generational lessons that are being learned, if you look at our grandparents' generation, who lived through the Great Depression, they certainly learned a lesson about debt. My parents paying off mortgages at double-digit rates was certainly a lesson learned.

If you're 25 to 30 years old today, you've experienced very low rates with respect to lines of credit and with respect to mortgages. It's hard not to learn that generational lesson now. As I mentioned, there's a relationship—it's not an exact relationship—between the rates that the bank sets and the rates that they get from their own financial institutions. But to what extent has keeping the overnight rate low had an impact with respect to household debt?

[Mark Carney]

Without question, it has supported the growth of household debt. Authorities, including the federal government, this Parliament, in terms of budgets, and the Bank of Canada had to make a judgment on how to support this economy, given the collapse of external demand for Canadian goods, and the judgment was to provide stimulus. With that came risks. One of the risks over time is that there will be a buildup in household debt, and we're faced with options. The government, OSFI, the Bank of Canada, and CMHC are faced with options regarding whether the best weapon to address that risk is the interest rate, whether we should deviate from our inflation target, or whether we should use other mechanisms to attack the problem more directly and ensure that there is appropriate borrowing. We're not against all borrowing. There are still going to be young families starting out who want to buy a house, and that's right; that's appropriate. There are people investing for starting a business. That's absolutely essential.

It's that generational risk point, to use your term, that we're concerned about: people taking on debt that throughout the life of the mortgage they won't be able to support as the economy and interest rates return to a more normal setting.

[The Chair, Conservative, James Rajotte]

I have about 40 seconds here.

I wanted to ask if you wanted to comment before the committee here on any role you may play with respect to the transition to the next governor.

[Mark Carney]

Commenting on that, my commitment to the board, to this committee, and to Canadians is to ensure that there is a seamless transition to the next governor. There is an independent committee of the board that is running a process. The intention is to reach a conclusion. They appoint the individual and it's approved by the federal cabinet. So there's a sort of two-key system there, as it was for all governors, including myself. It's appropriate.

My intention is to serve to June 1. The ideal, obviously, is a short transition, not too long, but a short overlap to assist that individual in taking charge. I'm highly confident that the institution will be well served by the next governor, whoever he or she is.

[The Chair, Conservative, James Rajotte]

My last troublesome question, because I know you're an Edmonton Oilers fan: when you move to England, are you going to cheer for ManU or Chelsea?

[Mark Carney]

I am an Everton supporter, which has a long history. I have some cousins in Liverpool, so I supported Everton. It's been more enjoyable being an Edmonton Oilers supporter than it has been being an Everton supporter of late, but the Oilers are coming back strong this year, and let's hope the Toffees.... Well, Everton is doing okay.

[The Chair, Conservative, James Rajotte]

Edmonton is doing very well.

On behalf of all committee members, thank you for being here, both of you. We look forward to seeing you back here in April with the next monetary policy report.

This meeting is adjourned.