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
In fairness to the governor, David, that would be in the regional Saskatchewan economy, wouldn't it?
Governor, Bank of Canada
The fact is that, as we said, when B-20 was put in place, we put in our monetary policy report estimates on how much of an effect that would have. It's not zero. It would have a slowdown effect in the housing market, because of course it acts very similarly to an interest rate hike in the system.
The fact is that interests rates have been extraordinarily low. The biggest risk we face in the financial system is that household debt is not able to cope with a more normal level of interest rates. That test was designed to help both lenders and borrowers figure out if they were capable of sustaining the mortgage they were thinking of taking on through an interest rate cycle of approximately 200 basis points.
I think that applies whether you are in Saskatchewan or in a market like Vancouver, where there were speculative juices flowing, or in Toronto, or in Atlantic Canada. It doesn't matter where you live; you're going to need to be able to withstand an interest rate cycle, because the economy is normalizing.
The quality of debt is what was at issue. If people can afford it today but can't afford it 100 basis points from now, then we're not doing them any favours.
Cypress Hills—Grasslands, CPC
In some of those other markets, increasing supply would have been as effective as hitting the demand side of it, I think.
I don't have much time here, so I want to ask you a second question—
Governor, Bank of Canada
I'm sorry. I must disagree with that, because we were not at any point trying to stop prices from rising by doing this. We were trying to improve the quality of household debt. Other policies were put in place to try to control house price rises. Supply would have affected that, but it would not have changed the affordability.
Cypress Hills—Grasslands, CPC
Okay.
So if one out of five prospective buyers who currently can afford their preferred purchase failed the stress test, what's the consequence for them? I heard a little earlier that they have one lender to deal with. They can't make their payments and they failed the stress test. What's the consequence of that?
Governor, Bank of Canada
If they failed the stress test, it means they would have problems over the next two, three or four years. If they managed to get that mortgage, they would have trouble affording it as interest rates rose, which we all know is—
Cypress Hills—Grasslands, CPC
I asked about people currently carrying mortgages, not new ones.
Liberal
The Chair Liberal Wayne Easter
Governor, you can answer, and then Mr. Anderson will have time.... We're flexible on time if there needs to be a supplementary question.
Go ahead, Governor.
Governor, Bank of Canada
They don't need to take the stress test again, unless they're changing lenders. If they're renewing their mortgage, there's no stress test.
Cypress Hills—Grasslands, CPC
Bankers aren't stupid on that one. If they're seeing that being applied in other places, they're going to apply it there as well.
Governor, Bank of Canada
As I answered before, I think bankers are smart enough to know that if they were somehow charging people more in that instance, everybody would hear about it. That would not be a good business practice.
Cypress Hills—Grasslands, CPC
I don't think that's enough to get them to change their ways.
I want to ask you one other question. It's about the challenges over NAFTA. Some of the initial rhetoric was around cheap steel coming through Canada. That was one of the reasons that were given for the imposition of the tariffs. I think our ambassador was very optimistic last week in saying that he expects that those will be taken away very quickly.
It was interesting. Ambassador Craft's response was that this is not something against Canada; it's just protecting North America from other countries that would be passing raw materials through here. What has changed in that situation to make us think that the tariffs will be coming down? Those countries are still passing that material through.
When we're talking to businesses, we're hearing that those tariffs are killing manufacturers, especially small and medium-sized manufacturers. With the tax reductions in the States, and with the increased payroll tax and all kinds of things, our businesses are not quite as optimistic as you've been today in your presentation about the economy.
Is there a way of dealing with that steel passing through here that won't interfere with international trade and our economy?
Governor, Bank of Canada
That is a very complicated question. That's why you would get more than one answer from different people. I won't give you some bottom-line judgment on that, but I'll try to explain it.
When we have a tariff—say, the United States puts on tariffs and then Canada puts on a countervailing tariff—what that does is raise the price on both sides of the border. One of the effects of that is that it creates a level playing field for an exporter. That's the reason it's put in place. The other part of it is that it raises the price for everyone. There are second-round effects that could be the most important ones for some of the people you speak to.
This is the most important and most unfortunate part of a trade action or trade war: that everybody ends up paying far more for everything. It is counterproductive. War of all types is counterproductive.
Liberal
The Chair Liberal Wayne Easter
We'll have to end it there.
Thank you all.
Mr. Fergus, you have five minutes.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
Governor and Senior Deputy Governor, thank you very much for your presentation and for your “Monetary Policy Report”.
I have read it. The document is always easy to read and understand, but I know that a lot of research and effort was needed in order to produce the report.
My questions are going to be about household debt in terms of interest rates and mortgage rates.
On page 18 of your Monetary Policy Report, you say: “The ratio of household debt to income has levelled off and is anticipated to edge down.” That is very desirable.
What will be the impact of interest rates on Canada's economic growth if, as anticipated, we continue to see a slight increase in the Bank of Canada's key interest rate?
Senior Deputy Governor, Bank of Canada
According to the projections we established in the Monetary Policy Report, the rise in interest rates matches what we mentioned in our media releases. When we make projections, we take that into consideration.
Given the increase in interest rates, we expect the growth of credit to be slower than it has been for several years. That is a good thing. In addition, because the economy is continuing to grow, people's disposable income should increase, at least on average, if not for each individual. The economy has sources of growth that are well distributed through sectors and, we hope, through regions. That situation will benefit all Canadians everywhere in the country.
The level of indebtedness will remain quite high. It will be a long time before we will be able to see it go down. We will also have to contend with a vulnerable financial system. Given our forecasts and our view of the situation, we are very aware of the need to properly assess the speed at which we should be increasing interest rates, specifically because of people's indebtedness.
We have no desire to increase interest rates too quickly. That is clear. At the same time, we must not forget that, if we do not increase interest rates at an appropriate speed, we are only pushing the problem back until later, because there will be imbalances, such as increased prices, in the real estate market. The governor has just said that we are seeing much less real estate speculation than previously. We will choose an appropriate pace and there will be a contribution from the residential construction industry, where there is much less activity than previously.
Once again, it is not a bad thing to have other sources of growth, like investments, which will increase the economy's capacity for growth in a sustainable way.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
I cannot find the information and I am not sure of the figures. You mentioned that the level of indebtedness is a certain percentage of household income. Is it 160% or 183%?
Senior Deputy Governor, Bank of Canada
I think it is around 170%, or a little less.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
Okay.
The target range that you mentioned goes from 2.5% to 3.5%. According to your models, what are your estimates?
Will that have the effect of slowing down Canada's growth rate, because of a possible slowdown, or a greater slowdown, in the real estate market?
Senior Deputy Governor, Bank of Canada
It is true that we have already increased interest rates. We have increased them five times since July 2017. Given that the economy takes some time to react, it will take time before interest rates have an effect on the economy. It is true that the effects of the movements in the real estate market and the growth rate are less than they would have been had we not increased interest rates. That is how monetary policy works.
We do not do this because we do not like growth as such, we do it to avoid causing an increase in inflation and creating instability, not only in the real estate market, but also in the incomes of Canadians and in the labour market.
Conservative
Pierre Poilievre Conservative Carleton, ON
Thank you.
Which measurement of inflation are you most relying on right now to make your interest rate decisions?
Governor, Bank of Canada
We have three measures of core inflation, and they use various techniques to remove the noise from the regular headline inflation rate, but the official target is for the headline inflation rate.