Finance Committee on Oct. 24th, 2016

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

Thank you very much.

I would like to go back to the inflation-targeting agreement.

Ms. Wilkins, you said that you had considered setting a range from 2% to 4% with a target of 3%. You said the disadvantages by far outweighed the possible benefits. It is still an increase of one percentage point though, which represents a 50% increase over the current rate.

Were other possibilities considered, such as a target of 2.25% or 2.5% rather than 3%?

Are there studies comparing the potential costs and benefits?

I'm just trying to see what the process was in studying that possibility. I would like to put that in the light also of the announcement that core inflation will not be used as a benchmark anymore. We're going to have to have different types of inflation with CPI. On the other side, in the last few years we have been a lot more worried about the possibility of getting into deflation than out-of-control inflation.

That said, I'd like to see what the thought process was at the bank on that issue.

[Carolyn Wilkins]

Yes, we did consider a 3% target in a range from 2% to 4%. As you will see in the documents we provided, we assessed the benefits in the context of a lower interest rate. We examined this for various targets up to 4%.

What we observe in this process is that the benefits of changing the target are limited and that the costs, which are in a way fixed, are the same. One of the reasons that monetary policy works so well is that inflation expectations are very stable. The potential benefits would be derived if people revise the credit system and their expectations in an orderly way.

As to core inflation measures, we have for a long time used the index measuring basic inflation or the inflation trend, CPIX, which strips out eight of the most volatile CPI components. As you can imagine, we try to target inflation, but—if you look at a graph—, it goes up and goes down; it fluctuates a lot. That is usually due to consumer energy prices. If we truly want a monetary policy that achieves stable inflation, the volatile components must be removed.

We did a study including the various core inflation measures used around the world. We found that, among certain criteria, there were three that worked. We also noted that the CPIX no longer works and was not helping us much. No measure was perfect, though. So we decided that it wasn't the target that was important, but rather that these measures would serve as an operational guide for us. We found that it was better to keep the criteria that worked very well and to use them as a base case.

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

I have very little time left.

I have one last question for you, going back to the inflation target.

I completely understand the success of the targeting agreement that has been in place since the 1990s: the key is that expectations are known. This also stabilizes expectations.

Ultimately, the argument you are making for the future, say in five years. when the agreement will be renegotiated, is that once again the rate will not be changed.

The agreements are for five years, but your argument is that the target rate will always be 2% because market expectations, those of investors and other influential actors, are always based on a rate of 2%. Would there be a way of changing that in the future or will it always be 2%, even though the agreements are for five years?

[Carolyn Wilkins]

What that means is that the bar is high.

I would not say it is impossible to change the inflation target for something better, because there are other factors that change at the same time. We will examine various things that will help us ask different questions for the next time. For example, from now on we will be relying on unconventional policies. So we might employ those policies.

Five years from now, we will have gained a lot of experience with countries that are employing this type of policy. We will be able to see how effective these policies are. That is one thing.

There are others where over time we have seen more indexing of the system. That is something that changes.

So a lot changes in five years. It is not impossible that this could change in the future, but we have to make sure it would be for the better.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Aboultaif, you have five minutes.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Governor, I would like to go back to my colleague Mr. Liepert's question about provincial debt.

You've answered the federal debt part of it. Should we care about the debt of the provinces? As you are the Governor of the Bank of Canada, how much do you care about the debt that the provinces are carrying right now?

[Stephen S. Poloz]

At the Bank of Canada we care about all of these things. There's no question about that. I don't mean to oversimplify when talking about only the federal debt situation, because obviously, the provinces are also borrowing on international capital markets, and that debt counts, too.

I agree with you that it matters. It matters, but I don't have specific numbers for you that is a bright line that we should be worried about.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

In your April report, you said you expect 0.5% this year and 0.6% next year as a return from stimulus. TD Bank expects 0.1% and 0.3%, respectively. Why is there such a difference between your expectations and TD Bank's expectations?

[Stephen S. Poloz]

You said it was TD Bank?

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Yes, TD Bank.

[Stephen S. Poloz]

All I can say is that every economist and every economics team does their own analysis. This is less a matter of opinion, but more a matter of modelling, and the assumptions that go in them. There can be many, many reasons why two different estimates could differ.

Traditionally, the kinds of models that we use would show that if there was a government fiscal expansion, there would be a tendency for interest rates to rise in response to this, and would actually cut off some of the effect.

If you look at any model that economists use, it will give you this result, but what's important is that you take the model into today's context. Today's context is one in which the economy has a great deal of excess capacity; whereas the original analysis would be where the economy is more or less where it belongs, so you get this kind of adjustment that happens.

When you're in a situation like we find ourselves in today, where interest rates are very low, where there is indeed a risk, as we talked about last week, that interest rates would need to be adjusted lower in order to get our inflation on target, in that context, you don't have those kinds of offsets that you often have in a standard model.

It is why we say that the mix of policy is such that fiscal policy has quite an advantage in this situation compared to monetary policy. Nevertheless, they both can work on the same issue at the same time, and it gives you a better mix than you'd otherwise have.

All those possibilities are open. I'm not going to debate a specific estimate with you, but economists are like that.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

I'm not going to ask who we should believe or—

[Stephen S. Poloz]

No.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

My third question is a shorter one.

[The Chair, Liberal, Wayne Easter]

I believe, Ziad, you'll get a different analysis. I see the parliamentary budget officer standing back there as well. I think he'd have a different estimate, too.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Mr. Poloz, you said that the child benefit should drive retail sales up, but retail sales fell off by 0.1% in August. That's three months straight.

Do you have any opinion on why this is happening, and why retail sales have been driven down?

[Stephen S. Poloz]

I know why we had a decline in August. It was mostly because of automobile sales. I don't think the child benefit would be the thing I'd be using to buy an automobile. I'm not sure we're getting a direct reading on that yet.

I'd like a little more time. The cheques have only been out there for a couple of months relative to the data, and it may be more of a back-to-school thing. I don't know, but we'll have to give it a little more time.

We can never make a conclusion off of one or two data points. These are very noisy data, and always are. That's the problem economists have, seeing through the noise.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

I know the child benefit is one of the measures that should have a quick impact on enhancing the economy, improving the economy, the immediate stuff at least to hold on to, and then it will kick-start and continue. However, nothing has made an impact. Rather, we've seen a negative impact or a negative turn.

Why? Instead of having at least a bit of a boost, regardless of how small or big, we've seen the opposite. Why?

[Stephen S. Poloz]

I'm going to disagree with you there. We simply do not have the data to support a conclusion like that at this stage.

It's simply too early to make any conclusion about how that fiscal impact will play out, none. It's just too soon.

[The Chair, Liberal, Wayne Easter]

We'll leave it at that, and turn to Mr. MacKinnon for the final questions. You have five minutes.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you, Mr. Chair.

Governor and Ms. Wilkins, thank you for taking the time to be here today.

From you remarks I can see that you have done your job, if I may say so. Now it is up to the government to do its job by adopting sound policies and a fiscal policy that support Canada's monetary policy.

We also know that psychology plays a major role in an economic recovery.

Can you talk to us about the role that consumers play in Canada's economy at present? Can you talk specifically about the mortgage rules and housing rules? How do you see Canadian consumers today? To what extent do they contribute to economic recovery?

[Stephen S. Poloz]

First of all, thank you very much. We are not the ones who did the work; it was the financial authorities. We have some leeway as regards monetary policy and we are prepared to use it if the data do not match ours. For the time being, the economy is on the upswing. We have made conservative hypotheses regarding exports. We are waiting for the rate of economic growth to top 2% in the coming quarters. The process of closing up the excess capacity will begin then.

[Steven MacKinnon, Liberal, Gatineau, QC]

In reply to a question from Mr. Aboultaif, you said that it is too early to assess the impact of fiscal measures, but you seem to be saying, at least in the abstract, that the fiscal measures taken by the government are necessary to support Canada's growth. I am just tyring to understand your point. You are saying that an expansionist fiscal policy is necessary at this time to ensure Canada's growth.

[Stephen S. Poloz]

I'm not saying that it is necessary, but that it can improve matters. As I said, we have some leeway with monetary policy and we are prepared to use it. At the same time, there is a great deal of uncertainty. We will have to monitor the data over the coming months. We will know more then, but for now we will keep the rate as it is. We are prepared to take action.

[Steven MacKinnon, Liberal, Gatineau, QC]

I will conclude with the following question. How would you describe the current state of mind of Canadian consumers?