Finance Committee on Oct. 29th, 2013

[Tiff Macklem]

I didn't really understand your question. In our two last reports, we tried to provide more detail on the risks, as the governor mentioned at the beginning of his remarks. When decisions about monetary policy are being made, uncertainty has to be taken into account. Risk management is an important part of monetary policy. In our report, we tried to give a bit more detail on the risks and the influence they had on our monetary policy decisions.

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

I was wondering whether an external factor, such as an increase in the risks, had caused you to make those changes.

[Tiff Macklem]

The changes to the format of the report don't really stem from that risk. We wanted to better explain the fact that we took the risks into account and their bearing on monetary policy.

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

I want to talk about inflation, which is persistently below target, as you pointed out. You make it clear this means that downside risks to inflation are assuming greater importance. That's a rather pessimistic view, even though you try to maintain some sense of optimism. How dangerous is this growing importance?

[Stephen S. Poloz]

This is an excellent question. That's basically why we have a 2% target for inflation. Usually, that provides us with fiscal room to adjust the interest rate according to the shocks. When inflation persistently remains above that percentage, the next risk is increased. The situation is okay if the risk is around 50/50, but if it is below that, the situation is more serious because we are starting out below the target. We want to have faith in the forecast that the inflation rate will increase to 2% and provide us with that fiscal room once again. If the risk continues to grow, we will have to weigh the risk of a more serious problem in the household sector.

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

Further down in your brief, you say that the CPI and core inflation should gradually return to 2% around 2015, but only if everything goes well. We will all be hoping for that outcome.

I would like to build on the question asked by Mr. Adler, regarding corporate cash reserves. One of the reasons companies keep very large cash reserves has to do with the fact that interest rates are very low. Companies have to assume the risks associated with their pension funds. If I understood Mr. Adler correctly, the accumulated reserves are $700 billion. I did not know that. Do you think the trend is accelerating and deteriorating fairly fast?

[Stephen S. Poloz]

If I have grasped the meaning of what you were saying, if the interest rate remains steady, the stress on pensions will increase. Is that what you're asking?

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

Yes, among other things.

[Stephen S. Poloz]

You are right, since the pension rates are used as a guide for those interest rates, usually over a five or ten-year period. It depends.

We see that the bond rates are increasing slightly. That's a symptom of the natural growth. Mother Nature is behind that. With another forecast, we are confident that the figures will increase in that way eventually. The point has changed, but we are talking about a very natural process that is to be anticipated.

Today, I would say that this is the maximum stress. That's currently our point of view.

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

We have to be careful about the breaking point.

[Stephen S. Poloz]

Yes.

[The Chair, Conservative, James Rajotte]

We'll go now to Mr. Hoback, please.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Mr. Chair.

Welcome, Governor. It's nice to have you here this morning and afternoon.

Tiff, it's always good to have you back in front of us. It's good to see you.

We've been working very hard talking about 2015, balanced budgets, and getting to the point where we no longer have a deficit here in Canada. My concern is that the federal government is working hard to achieve this, but at the provincial levels we're seeing large amount of deficits and indebtedness. What is the impact on your forecast if we don't see any curbing of provincial spending and their debt levels?

[Stephen S. Poloz]

We, of course, have no direct impact on the fiscal situations themselves. They are variable, and it's important for us to take that into account when constructing the forecast. We take government policy however it has been laid out and plug it in to our models. If it changes, then of course we have to change it.

I have no opinion one way or the other on how that's going to play out. At this stage, one of the things I find reassuring is that discovering that the federal deficit is less than we expected is probably a sign, in some part it's probably a sign that the economy is strengthening and that those revenue lines are improving in the background a little bit more than maybe the base numbers suggest to us. It's a positive sign in general for me.

Tiff, would you like to comment on that?

[Tiff Macklem]

No, I don't think there is much to add.

As the governor indicated, in terms of fiscal policy, whether it's federal, provincial, or municipal, our projections pertaining to the Monetary Policy Report are based on the announced policy tracks, so it takes into account what has been agreed.

[Randy Hoback, Conservative, Prince Albert, SK]

As for your policy then moving forward, provincial indebtedness would be a factor in your equation, but it wouldn't necessarily overrule the economy one way or the other?

[Tiff Macklem]

As fiscal policy changes, that would have an influence on our assessment, and we take that into account, along with everything else, in taking our monetary policy decisions.

[Randy Hoback, Conservative, Prince Albert, SK]

One province having a high debt level would not necessarily impact Canadians right across Canada then in that scenario.

[Stephen S. Poloz]

No, it wouldn't. For us it would be something to add into our analysis of the macroeconomy. We're looking at the bigger picture there, and what it means for economic growth. A substantial fiscal shock in one part of the country can of course affect that projection one way or the other.

[Randy Hoback, Conservative, Prince Albert, SK]

Seriously then, if we look at something in the resource sector, if we look at Fort McMurray, for example, we see the impact that has on Fort McMurray, and everybody talks about the impact on Alberta. If I look at Saskatchewan, I see the impact there, and actually, if you look across Canada, the amount of money that is being spent there and how it's divesting right across Canada, the investments are being made by businesses in Ontario and Quebec. How does that impact the model if we don't see growth in that region?

[Stephen S. Poloz]

Well, the story you tell is exactly right. In fact, there are really strong cross-sectoral and cross-country linkages of the sort you describe. Spending in one province immediately affects many others. We'll see the aggregate numbers and say it must be because of that. It's not something you can actually trace at that level of detail.

The bigger picture here is that we've gone through a period where we had a down cycle in the global economy but strong commodity prices, especially energy, which meant that Canada had this extra income coming in. This drove additional investment and employment gains in that sector. Exports, investment and employment gains, and incomes—that's what we want for the whole picture. But this has been the leading part.

The spillover effects go across the country, but you can see that it's still concentrated. What we're expecting to see is a rebalancing as we go forward where everything begins to catch up to that kind of speed. There's a certain amount of regional difference. It stresses the adjustment process—people move etc. and it's unavoidable. Economists call that a terms-of-trade shock. In this case, it's a positive one, which is good for Canada because of the extra money coming in.

[Randy Hoback, Conservative, Prince Albert, SK]

When a particular party is against Keystone or pipelines in general, they're not only fighting against jobs in Alberta; they're actually fighting against jobs right across Canada. Is that fair to say?

[Stephen S. Poloz]

If you're asking if a pipeline investment would have impacts across Canada, the answer is yes.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Hoback.

Mr. Rankin.

[Murray Rankin, NDP, Victoria, BC]

Welcome, both of you. I want to pick up on Mr. Côté's comment about pensions. Recently the chief executive officer of the CIBC spoke out about the need to improve public pensions. We've also heard provincial finance ministers speaking out strongly about the need to increase the Canada Pension Plan and the Quebec Pension Plan. Do you agree that this is an important component of our economic planning for an aging population? Is that something of relevance to you in your analysis?