Finance Committee on Feb. 12th, 2013

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

If I can summarize, what you're suggesting is that the only thing we can do, and the best thing, if we use your 20/20 vision, as you suggested to Mr. Brison, is to concentrate on pipeline capacity and refining capacity. Is that fair to say?

[Mark Carney]

This is an infrastructure issue, yes. Those are the two main pieces, yes.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Jean.

Mr. Caron, you have the floor.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you, Mr. Chairman.

Welcome, Governor and Senior Deputy Governor.

I am going to ask my three questions all at once and then hopefully you can respond in the same order.

I will begin by saying that I would like to acknowledge the arm's length nature of the governor and the Bank of Canada in terms of monetary policy. However, several questions came to mind when I read your remarks to the finance committee of the British Parliament. I will ask you one of those questions.

You suggested the possibility of using a nominal GDP target rather than an inflation target such as the one we now have. I was a little perplexed by that comment, given the Bank of Canada's current situation. I would like to hear your comments on that and give you an opportunity to give us your perspective.

Furthermore, the Bank of Canada recently noted that Canadian exports have decreased in part because of competitive issues, including the continued strength of the Canadian dollar. Given that the federal government has very little power over the exchange rate, could you tell me if in your opinion multifactor productivity growth should be a priority for the federal government, and if a long-term stable plan for infrastructure investment could be a way of counteracting that weakness in productivity?

Last, the vice-chair of the United States Federal Reserve, the FED, gave a presentation yesterday and said the following. I will read the quote in English.

“Both for the United States and for Europe...fiscal austerity does raise unemployment, weaken the economy and...in addition undermines the goals it is designed to achieve”....

The direction that the Canadian government has taken has focused on austerity even though the extent differs from that of the United States. I would like to hear your comments on the statement made by the vice-chair of the FED and what its implications could be from a Canadian perspective.

[Mark Carney]

Thank you very much.

Mr. Chairman, how much time do I have to answer those questions?

[The Chair, Conservative, James Rajotte]

You have about three minutes.

[Mark Carney]

Good.

In terms of inflation control, it is still the Bank of Canada's position that a flexible framework for inflation targets is the best. Here in Canada, we are in a very different position from that of the United Kingdom. We do not have significant public and private deleveraging. We do not have a zero floor. The financial sector is not experiencing the same problems that they have. As I stated last week, I support a flexible framework for inflation targets in Canada and in the United Kingdom. One of Canada's great advantages is that every five years, the Government of Canada, the Bank of Canada and this committee undertake an analysis of the situation. That is an opportunity to strengthen or modify the framework. It is under that process that we can review the framework.

I'm going to switch to English to be quick.

On the weakness of exports, yes, it's an issue of competitiveness, and it's related in part to the persistent strength of the dollar. Two-thirds of that loss of competitiveness over the last decade or a little more has been because of the strength of the dollar. We haven't grown productivity to make up for that. We are in a situation in which there are a variety of factors and in which our dollar has moved from being undervalued to being persistently strong in our terminology. It's not clear whether those factors are going to move away.

Canada is a bit of a safe haven. There's lots of desire for investment here, and we're in a relatively strong position. That being said, the Minister of Finance and I released a statement this morning on behalf of the G-7, which reaffirmed the commitment of the G-7 to ensure that monetary policy is focused on domestic objectives, not on targeting exchange rates. We hold the members of the G-7 to that long-standing position. This is extremely important. It's important that we, as the G-7, go into the G-20 united and forceful to enlarge that commitment as quickly as possible amongst the major emerging economies in the G-20, some of which entirely ascribe to flexible exchange rates and are supportive, and others of which have a lot of work to do in this regard, because, in part, of the dysfunctionality of the international monetary system.

Lastly, on fiscal policy, the position of the U.S. and Europe is very different from that of Canada. The U.S. has the benefit of having the reserved currency. It is at the zero lower bound. Fiscal policy is much more expansionary at the zero lower bound. Europe is not in a position to have the flexibility of the U.S. In Canada, I think, as well, despite all our safe-haven attributes, it's important that we reinforce it. I'll leave it to the elected officials to decide how quickly, but we're not the United States, and we don't have the flexibility that they enjoy.

[The Chair, Conservative, James Rajotte]

We'll go to Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Mr. Chair.

I want to begin, Mr. Carney, by thanking you for your service to Canada. Canadians are indebted to you. We're certainly going to miss you.

I just want to pursue a line of questioning that you had broached in your previous answer to Monsieur Caron. I want to talk a bit about the burgeoning currency weakness, i.e., the currency war. Some have said, given the appreciation of the Canadian dollar over the last number of years, that we should be pushing the dollar back and undervaluing the currency. That would be their solution to having a Canadian industrial policy. The French foreign minister, as you know, just said recently that the rising euro will have a negative effect on European growth.

Could you talk a bit about how managing exchange rates as an alternative to monetary policy would negatively impact the Canadian economy and what effect that would have on the global economy, or in reverse?

[Mark Carney]

Yes. This is an important point, and it goes to Monsieur Caron's question on our monetary policy framework.

We have a commitment to flexible inflation targeting, as you know, and an important component of that is a flexible exchange rate. I can link a few of the questions we have here—i.e., why do we have a flexible exchange rate? We have one of the longest histories in the advanced world with flexible exchange rates. In effect, it acts as a shock absorber, as there are shocks both domestically or internationally—shocks potentially, for example, to commodity prices that we see.

The basic point we make and that we've observed, and are observing elsewhere, is that the economy needs to adjust to these shocks. The exchange rate helps with that adjustment. If we were to persistently intervene and try to control the exchange rate, there's a variety of challenges with that. But even if we were successful, there's a variety of operational challenges with actually being successful in, say, holding the exchange rate down.

But even if we were successful, the economy would adjust anyway, and we would see the adjustment more broadly in the case of wages, for example. So if we had a fundamental competitiveness problem, and we were forcing the adjustment through falling wages in Canada, that is a much more difficult adjustment than to have an adjustment in the exchange rate that would flow naturally.

This is—and I hate to say it, but it's true—part of the challenge that a number of members of the euro zone are experiencing right now. In order to restore competitiveness, in effect they have to have deflation on wages, and that is extremely difficult and socially destructive.

[Mark Adler, Conservative, York Centre, ON]

We have a very aggressive trade agenda. What effect would that have on negotiating future trade agreements and on trade in general?

[Mark Carney]

Do you mean if we were to target the exchange rate?

[Mark Adler, Conservative, York Centre, ON]

Yes.

[Mark Carney]

The expectation, I'm certain, in all of the discussions is that Canada is a free-trading nation and supports free movement of capital as well. If we were to try to control the level of our exchange rate, we would have to take a variety of steps and start to close what is one of the most open and effective, we would argue, capital markets and money markets in the world in order to be successful.

Then a series of regulations that would come into place and restrictions that would come into place there would be inconsistent with the overall move towards free markets. That's number one. Secondly, there would undoubtedly be a suspicion that we weren't trying to move the exchange rate to an equilibrium level but were trying to gain a competitive advantage by moving the exchange rate below an “equilibrium level”.

The exchange rate will find its equilibrium over time. There can be periods where it's persistently strong. That does take some adjustment. We are in a position right now in Canada where we know that we're not as productive as we could be and need to be. We know that we have to diversify our trade, as the trade agenda suggests.

Our suggestion is that we focus on the things we can control, which is the trade agenda, making the country more productive, as Monsieur Caron suggested. In that regard, a strong exchange rate is to our advantage, because we import most of our machinery, equipment, and ICT.

[The Chair, Conservative, James Rajotte]

You have time for one last very quick question.

[Mark Adler, Conservative, York Centre, ON]

I'm okay. My question would take too long.

[The Chair, Conservative, James Rajotte]

Okay. Thank you, Mr. Adler.

Mr. Côté, you have the floor.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you very much, Mr. Chair.

Governor, Senior Deputy Governor, thank you for coming today.

I am going to move away from the big economic issues now and bring you into my beautiful riding of Beauport—Limoilou. Last October, I organized, along with my colleagues in the Quebec City region, a forum on credit card costs. As you know, for about five or six years now, there has been an unbelievable explosion of credit cards and other types of cards, such as reward cards. It is a problem that is hitting retailers generally at various levels. Even Walmart reacted to this in the United States.

Let's talk about the Canadian situation. Let's be frank, our retailers' hands are tied. For any one credit card company, they do not have a choice. If they want to provide Visa transactions, for example, then they have to accept all cards under that brand. Our retailers are telling us that this is a very serious problem. It is very hard for them to do any forecasting for the purposes of making a reasonable profit.

Do you think that this is a major problem? Do you think that this is an actual transfer of wealth from small retailers and the public in general to a financial sector that is less tied to the economy?

[Mark Carney]

Mr. Macklem will respond to that.

[Tiff Macklem, Senior Deputy Governor, Bank of Canada]

Thank you.

There are all kinds of innovations, and significant competition in the credit card sector. There are good innovations and not-so-good innovations. We have seen that in the financial sector over the past few years.

It is not the Bank of Canada's mandate to regulate credit cards. The Minister of Finance established a code of conduct for credit cards in an attempt to deal with the kind of problem you have raised.

The Bank of Canada is more concerned about the significant increase in household debt. As Mr. Brison pointed out, even though the rate of increase in household debt has slowed down, the level of household debt is still high. There are currently positive developments in household imbalances but it is too soon to let down our guard.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Nonetheless, there has been an erosion of purchasing power. We could talk about transaction fees set by banks who do not even wait for one year to end before modifying the fees exacted from clients. That represents a considerable amount on a national scale. It ends up reducing individuals' purchasing power. This phenomenon is therefore problematic for the domestic market.

[Tiff Macklem]

I don't think that it is up to us to defend the private banks. They have their policies and I would encourage households to find the best options for their situation.

[Mark Carney]

I would just like to add that the situation is more serious in places like Australia and other countries. That also means that we should be acting here.

As Mr. Macklem pointed out, the Minister of Finance established that code of conduct. It should be implemented.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

The code of conduct is simply a statement of intent.

[Mark Carney]

Yes, but it also implies that the responsibility lies with

FCAC, the Financial Consumer Agency of Canada.

It is the Financial Consumer Agency of Canada's responsibility to monitor the situation.