Evidence of meeting #181 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was rate.
A video is available from Parliament.
Liberal
The Chair Liberal Wayne Easter
We'll call the meeting to order and welcome the governor and the senior deputy governor of the Bank of Canada.
Before we get to the Bank of Canada testimony, we have hopefully very quick committee business to deal with.
I believe you have a motion, Mr. Sorbara.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Yes, Mr. Chair.
Everyone should have a copy of the motion that was done in the subcommittee.
Liberal
The Chair Liberal Wayne Easter
We need a motion to accept the committee report.
The subcommittee met on Monday, October 29. Members have a copy of the motion that was agreed to, which outlines the procedure and how we'll handle Bill C-86. I don't think there are any additions to it. Point 2 indicated that, in relation to the pre-budget consultations, the proposed travel to San Francisco and Houston, Texas, scheduled for the fall, be postponed until a later date. Third, the order of reference to commence the study of Bill C-82 would be dealt with in early 2019.
That's the motion, and members of all parties were there.
Is there agreement on the committee report?
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
I'd like to put forward another motion as well, please.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Can I get the clerks to distribute the motion?
Would you like me to read the whole thing?
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Okay. I move:
That:
(a) the Chair of the Committee write, as promptly as possible, to the Chairs of the following standing committees to invite them to study the subject matter of the following provisions of Bill C-86, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018, and other measures: (i) the Standing Committee on Environment and Sustainable Development, Part 1, divisions 13, 18 (1) (8) (9) and 19 of the Bill; Part 2, divisions 41, 44, 45, and 53 of the Bill; Part 4, division 5, clauses 176 to 178; (ii) the Standing Committee on Justice, Part 4, division 20 of the Bill; (iii) the Standing Committee on Transport, Infrastructure and Communities, Part 4, divisions 22 and 23 of the Bill; and
(b) for the standing committees listed in (a), (i) recommendations, including any suggested amendments, be submitted in both official languages, in relation to the provisions considered by them, in a letter to the Chair of the Standing Committee on Finance, in both official languages, no later than 4:00 p.m. on Tuesday, November 13, 2018; (ii) any amendments suggested pursuant to paragraph (b)(i) shall be deemed to be proposed during the clause-by-clause consideration of Bill C-86, and further provided that the members of the Standing Committee on Finance may propose amendments notwithstanding the recommendations received pursuant to paragraph (b)(i); (iii) if a standing committee listed in (a) chooses not to consider the subject matter of the provisions, it advise the Chair of the Standing Committee on Finance by letter, in both official languages, no later than 4:00 p.m. on Thursday, November 1, 2018.
Liberal
The Chair Liberal Wayne Easter
That's the day after tomorrow.
It is so moved. Is there any discussion?
(Motion agreed to)
Liberal
The Chair Liberal Wayne Easter
Thank you all. Just a warning, we may have to meet tomorrow evening starting about 5:30 or so to clean up the money laundering tariffs and financing report. We're trying to work it out with Dan Albas from the Conservatives so he can be here.
With that, thank you for your indulgence, Governor. The floor is yours.
Stephen S. Poloz Governor, Bank of Canada
Thank you, Chair.
Good afternoon, Mr. Chairman and committee members. Senior deputy governor Wilkins and I are pleased to be with you today to discuss the bank's monetary policy report.
Last April, we talked about the considerable economic progress that we had seen. We explained that, after a lacklustre start to 2018, growth would rebound in the second quarter, coming in at around 2% for the rest of the year. We also said that inflation would stay somewhat above our 2% target this year, boosted by temporary factors whose impact would unwind over time, returning inflation to target in 2019.
Six months later, we have seen some very positive developments. The Canadian economy is doing very well and continues to operate near its capacity. Growth is relatively broad-based across sectors and regions. It is also more balanced, as the composition of demand shifts towards business investments and exports and away from consumption and housing.
The economy will grow at a rate slightly above its potential over our projection horizon, supported by both foreign and domestic demand and favourable financial conditions. Meanwhile, inflation is close to target after running a little higher than we expected in July and August, which was due in large part to changes in the way that Statistics Canada measures airfares. While there could be further volatility in inflation in the coming months, our core measures remain firmly around 2%.
Of course, the outlook remains subject to important risks and uncertainties. Please let me highlight two issues: trade and household indebtedness.
In April, we said that the most significant risk to our inflation outlook was the prospect of a large shift toward protectionist trade policies around the globe. We also reminded members that our forecast included the negative effect of increased uncertainty on the export and investment plans of companies. Naturally, we spent a considerable amount of time ahead of last week's interest rate decision discussing the implications of the recent U.S.-Mexico-Canada trade agreement. The USMCA is good news, because it will reduce a considerable source of uncertainty that has been holding back business investment.
We know from our latest business outlook survey, which was completed before the agreement was reached, that investment plans were already quite positive, as firms look to take advantage of a strong U.S. economy. Given the agreement, we reversed some of the markdown of our investment outlook. To be prudent, we did not remove all of it, for two reasons. First, we want to see how firms actually adjust their investment plans. Second, we know that competitiveness challenges are also weighing on investment.
Protectionist trade actions, particularly those involving the U.S. and China, were also top of mind for us, as they are already affecting the global outlook. We've incorporated in our forecast the expected effects of the tariffs imposed to date, as well as the dampening effects on confidence from threats of additional measures. All told, we estimate that this will amount to a drag on the global economy of 0.3% by the end of 2020. That is a big cost. It adds up to more than $200 billion U.S.
The U.S.-China trade issue represents a two-sided risk for Canadian monetary policy. The U.S. and China could find a path to ease or resolve this trade conflict, which would be positive for global trade and investment and for Canada. Or, the conflict could worsen, jeopardizing key global value chains. This would surely reduce long-term growth and prosperity globally, albeit with uncertain implications for inflation. For more information on the potential impact of U.S.-China trade tensions, I refer you to box 1 in our MPR.
As for household indebtedness, we've also been assessing how people are adapting to both higher interest rates and the changes to the B-20 mortgage underwriting guidelines implemented earlier this year. Box 4 in the MPR goes into some detail on the impact of these policy changes on mortgage lending.
Overall, the data tells us that households are adjusting their budgets largely as expected. We understand this can be quite difficult, particularly for those who are highly indebted. At the same time, employment and incomes continue to grow, which can help cushion that adjustment process. Further, the quality of new debt is improving and housing activity is moderating to a more sustainable level. All of this is making the economy more resilient and reducing the chances of painful outcomes for many people further down the road.
The rule changes also appear to have taken the wind out of the sails of speculators in some markets, reducing the pressure on housing affordability. While financial system vulnerabilities remain elevated, the fact that they have stabilized and edged down in a number of respects is positive.
Let me conclude by pointing out that even with last week's increase in the policy rate to 1.75%, monetary policy remains stimulative. In fact, the policy rate today is still negative in real terms—that is, once you adjust for inflation. Our estimate of the neutral rate is in a range: currently 2.5% to 3.5%. The policy rate will need to rise to neutral to achieve our inflation target.
That said, the appropriate pace of increases will depend on our assessment at each fixed announcement date of how the outlook for inflation and the related risks are evolving. In particular, we will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt, and whether strong consumer confidence builds on solid job and income growth and leads to greater-than-expected consumption. We'll also pay close attention to global trade policy developments and their implications for the inflation outlook. Again, this risk is two-sided.
With that, Mr. Chairman, Senior Deputy Governor Wilkins and I would be happy to answer your questions.
Liberal
The Chair Liberal Wayne Easter
Thank you, Governor.
I'll just make one point, and then we'll go to Kim.
I come from a time when I was paying an interest rate to the bank of 23.5%, so it was substantially higher at that time, and it wasn't a pleasant time for farmers or house owners.
Ms. Rudd, you have seven minutes.
Kim Rudd Northumberland—Peterborough South, Lib.
Thank you, Chair.
Thank you, both, for coming and joining us today.
Governor Poloz, I remember when you were at the B7 finance summit in Quebec City. You talked to us a lot about “home” or “neutral”. You mentioned it today again in your remarks. You characterized this “neutral” or “home” as between 2.5% and 3.5%. I wonder if you can go into a bit more detail about why you see that range as being the number for Canada's interest rate currently.
Governor, Bank of Canada
This is research that is actually quite global in nature. In fact, our counterparts at the Federal Reserve in the United States also believe that their neutral range is the same—2.5% to 3.5%. This is a number that is ground out of the global saving-investment balance, and the use of funds and the provision of funds in financial markets.
There are several approaches that we take to estimate this number, and they give us a range of outcomes, so there's not a knife-edge point for them. It is the rate at which we believe monetary policy would no longer be stimulating and would not play a contractionary role, so it's a balancing number. It's the sort of thing that also can change through time depending on conditions such as headwinds and the economic outlook. If household debt is weighing on the economy, possibly it would be at the lower end of that range. If it isn't, it could be further up. It depends on other factors as well.
Perhaps that's enough background for you. We think it's somewhere in that range, but we won't really know until we get closer to it.
Northumberland—Peterborough South, Lib.
Right. Stay tuned, as they say.
I was reading an article in the Financial Post last week—actually, maybe it was this week. Kevin Carmichael wrote it, and he noted that in the recent policy communications of the Bank of Canada, the term “gradual” has been dropped. I see Ms. Wilkins nodding her head.
Prior to it being dropped, it had been used in the previous three consecutive policy statements. When referring to rate increases, is it, as the article suggests, because we can expect more frequent interest rate hikes? I'm asking you because articles suggest lots of things.
Carolyn A. Wilkins Senior Deputy Governor, Bank of Canada
You're absolutely right. We had been using that word, and the reason we decided to use different words was to make clear a couple of things. One was that it wasn't meant as a single word code for “every other meeting”. In fact, given where we are in the cycle, while we know the direction of interest rates, the pace really does need to be determined by what's happening in the data and our assessment of a couple of factors that we did highlight in our press release related to how households are adjusting to interest rate increases, as well as how trade developments are evolving—not just in Canada, but in particular between the U.S. and China.
We felt that explaining the main factors that would underlie our assessment would make clear to people—which we believe is extremely important—that a decision is taken at every meeting based on our assessment of what we need to do to meet our inflation target in a way that balances all the risks out there. We don't wait until every other meeting.
It's interesting; words that you use that work well a couple of times eventually become code, and people read that one word and forget to read the rest of the things that we carefully say to impart a lot more information. In fact, what I thought was positive about the last week in the coverage was the fact that people were doing exactly that—looking at the full range of information that we were giving about the forecast.
Northumberland—Peterborough South, Lib.
You mentioned the USMCA and the consideration you had. That is part of the consideration around the decision to increase the rates. As you know, the government is in discussions and has just signed the CPTPP. Other trade agreements are on the horizon. Can you talk about Canada as a global player in trade and how you see that affecting some of the decisions you're making?
Governor, Bank of Canada
Certainly, the Canadian economy cannot sustain itself without a great deal of foreign trade. It's a question of scale. You need to have a certain amount of scale in the production in order to get the efficiency that makes you competitive in the international markets.
NAFTA, as we used to call it—now the USMCA—was a very important building block for our economy. The uncertainty about its future was causing firms to delay or in fact move investment decisions, often to the United States. Even though NAFTA never ceased to exist, and the USMCA now has been initialled or is ready for ratification, the fact of the matter is that over the last almost two years, we have already lost out because of the uncertainty it's raised.
What we were heartened by was that in our survey of companies, they were still prepared to invest, because they were operating at capacity and they needed to expand in some way. The fact that now we have that uncertainty at least partially lifted augurs well for the outlook in terms of investment and therefore presumably our capacity in job growth, productivity, and wage growth. All those things are connected down the chain. Obviously, other agreements are not really a substitute but a complement for USMCA, because they open up access in other places.
All those things I think are positive in a world where trade has become the way to do business. Tariffs are not that high in many of these cases, so they're not impediments to trade, but anything you do to make it more efficient just goes directly into that engine, which gives us growth.
Liberal
Blake Richards Banff—Airdrie, CPC
Thanks, Mr. Chair.
I appreciate your being here and giving us your update today.
I want to touch on one of the items you mentioned in your opening comments in regard to consumer debt. You mentioned specifically the B-20 mortgage guidelines. I want to touch on those a little bit. You mentioned a couple of things. You felt it had some impact on consumer debt, but you also indicated that it had some impact on housing prices in some markets. I want to touch on both of those items a little bit further.
First, in terms of the consumer debt itself, have you looked at or studied or factored in the idea of consumer debt as a whole? In other words, you're saying that you're seeing some impact on people in terms of the mortgages. Obviously, we've heard anecdotally that maybe as much as 20% of buyers are finding it more difficult, maybe even impossible, to get into the market. Obviously, when we're talking about people getting CMHC-insured mortgages, that is something people can understand, but when we're talking about people who are putting that 20% down payment or more, and are therefore not having the mortgage insurance, are we then instead, by having the stress test....?
Have you done any studies on whether what's happening is that instead of a mortgage, they're just taking on other types of debt, maybe buying a car or whatever? Instead of actually reducing the amount of debt, are we just changing it to a different type of debt? When you're talking about a car or something like that, it's certainly not, in most cases, as good an investment as a home, for example.
I'm just curious to know whether you have looked at that and whether there's just been a shift in the type of debt rather than a complete lowering of it.
Senior Deputy Governor, Bank of Canada
Sure. I'll get started. There's a lot in that question.
If we just start with the debt part, it's a very important question how that's evolving, because, as we said, it represents a vulnerability to the Canadian economy that we need to keep in mind. What we've seen in the actual numbers is that the debt-to-disposable income ratio, which is one of our flagship indicators, is not the only one. In fact, that stabilized and started to edge down, so credit growth and total credit growth have dropped by a lot. The growth rates have dropped by a lot, mostly because of mortgage credit, but not entirely. That's a big ship to try to turn around. It will take a while for that to come down, and it requires income growth.
I think more important is really what's going on under the hood there. It's related to the quality of new mortgage lending. There's some very interesting work that's in our monetary policy report, in one of the boxes, and in a couple of weeks we'll have a more complete study that just looks at the quality of the new mortgages that are being underwritten, after not only the most recent B-20 guidelines but the ones before, as you said, that apply to high-ratio mortgages. What we're seeing in the numbers is that the mortgages that are going to highly indebted individuals have dropped by a lot. They've dropped across the board, but mostly for those who have loan-to-income ratio of 450% and above.
Yes, that means it is more difficult for some to get into the market. You used the 20% number. There are others out there. We're seeing estimates that are very close to what we had expected. At the same time, it means that the mortgages that are being written are more likely to stand the test of time and serve those people well, because if you buy a house and later it's too difficult to handle because interest rates increase, that's an issue. Also, if you buy a house and the price of it, your equity, is at risk because house prices, at the time, were rising in the double digits in some jurisdictions and they have slowed a lot, again what that means is that the housing market is operating at a lower but more sustainable pace.
We understand it's a very difficult transition for many people—we know that—but at the same time it does set the economy on a more solid footing going forward. That means that people's jobs and people's incomes are more likely to be less volatile.
Banff—Airdrie, CPC
Thank you.
In terms of this B-20 test, though, I think it also applies when someone is renewing a mortgage, and I guess we probably haven't had much opportunity to see the impacts there yet. Certainly, we can tie people into situations where they're actually going to have to pay a greater rate for their mortgage, because what happens of course is that if they're not able to qualify under that new test, they can't move to a different lender. They can stay at the lender they're at, but have we looked at whether that's actually driven up the rates of the renewals? Obviously, if a lender knows they have that person captive now, because they're not able to move, they're probably not going to offer them the same kind of rate as they might if they were competing. Has that driven up those rates?
We're not talking about discouraging people from getting into debt they can't afford at that point. What we're talking about is someone who has put down a significant amount in a down payment and is now stuck with one lender and it's driving up the rate, therefore costing them more money, but not really having an impact on debt, of course.
Have we seen whether there's been any impact in that regard?