Finance Committee on April 12th, 2017

[Stephen S. Poloz]

We don't form a view in the way you describe. In fact, the Canadian dollar is most correlated with the price of oil because of the importance of oil in the economy. When the price of oil was around $100, the Canadian dollar was in the nineties—actually around a hundred cents.

We have models that try to capture the historical relationship between oil and the dollar. The dollar does have some other things to it. Not just oil, but other commodities matter, and the interest rate differential between Canada and the U.S. matters. But that's about it. It's a pretty simple model of how the exchange rate is determined.

In real life, everything that moves affects the market's estimate of what interest rates will be some day, because it interacts with what inflation will be. That means that anything that moves can affect the dollar, because it changes that expectation.

In economists' models, really, anything that moves in the model, the exchange rate reacts to. It makes it very hard to ever form a view of what the appropriate level is. It all depends on the forces acting on the economy at the time.

There simply is no hard and fast rule. As I said earlier, that's exactly why we have and why we need a flexible exchange rate. We can't be forcing it to be somewhere or expecting it to be somewhere. So many other forces can act on it. We need to focus on something that is of general use, and that is the inflation rate, which thereby clarifies decision-making both for businesses and for households. That's something they can count on, that we're going to keep inflation close to target.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

I don't disagree with anything you've said. I just think that if we took some of your modelling that you talked about today, which, again, I don't disagree with—the 50-buck oil or whatever the modelling was based on—we can see that we have a number of warning signs from the U.S. on everything from increased interest rates.... I don't even think that's a warning sign. I think that's a given. We've pretty much indicated that we're not going to go there, whether it's a border tax or whatever it is. All of these things that are likely coming at us are going to continue to put pressure on the Canadian dollar. At least, that's the common belief.

For starters, would you agree with that? Then, if that is the case—and I recognize that I've started my question with “if”—where do we get to on the point of the dollar if the dollar happens to get.... Is a 65-cent dollar good for the country or not good for the country? It's always been the belief that a low dollar drives manufacturing exports. As we've discussed, it has to a degree, but not to the degree that could offset the impact of oil prices. I'd just like to get a sense from you on that, but primarily the external factors from the U.S.

[Stephen S. Poloz]

In the U.S. case, everybody in the marketplace knows that the U.S. economy is at full employment and that they have begun to normalize interest rates. Everybody also knows that the Canadian economy is in a different spot and that we're likely to strike an independent course. Those two understandings are built into the marketplace and are in the prices that we see today.

Assuming that those two things unfold as people expect, I would not expect large movements in the Canadian dollar, but if something else changes, such as the price of oil, for example, then it would.... It's why we can't make some sort of firm prediction. It's really the market that drives it, and we appreciate that, because the market sees everything, and all those transactions, billions of transactions, are driving the dollar around. It would be wrong for us to try to offset those things.

Finally, is a low dollar always a good thing? Well, it is selectively good. It is good for a company that has mostly Canadian content in their business. That would be, say, in agriculture, but not necessarily, because equipment may be imported.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Yes.

[Stephen S. Poloz]

We're always hearing from companies that it's a two-edged sword, isn't it? There is no simple case for a low or a high dollar. It's driven around by these forces.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Very briefly, Mr. Chairman, we've recently had a number of foreign companies in the oil sands sell-off, indicating that they're not going to continue operating in the oil sands. Does that pullback of investment give you any concern?

[Stephen S. Poloz]

No, it doesn't give me any concern. In fact, I see strong international interest in Canada as an investment destination. It's been enhanced, actually, in recent months, I would say. I think that is purely a sectoral decision by a global company that has multiple opportunities to deploy capital and has reassessed its situation. I don't think of it as a nationality thing in any way.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thanks to both of you.

Mr. Grewal.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you, Mr. Chair,

Thank you, Governor and Deputy Governor, for being here. I really appreciate it.

There was an article in The Globe and Mail, just before you sat down, that said you were commenting on speculative risk in the Toronto housing market. This committee studied housing and is about to present a report to Parliament. The housing question is obviously a regional problem. There are different issues in different parts of the country.

In my neck of the woods in Brampton, it's just gotten out of hand. In Brampton East, the month-over-month price increases are $30,000. It's very much speculative in nature, with people owning four or five homes.

What type of risk does this present for the Canadian economy? In your opinion, would an interest rate hike help slow down the speculative nature of the housing market?

[Carolyn Wilkins]

We've discussed this at length in the financial system review. What we see is a combination of very elevated prices that may not make much sense if you look at the fundamentals combined with a large amount of debt. And it's not just aggregate debt. If you look at the different neighbourhoods where prices are high, you see that the people living there and have the mortgages are also the most indebted. They may have debt-to-income ratios over 450%.

That combination creates a vulnerability. We call it a vulnerability because what it needs is a trigger to make that vulnerability turn into a risk that materializes. Of course, this would be a big drag on the macro- economy, depending on how big and widespread the event was. In the worst case, it would be an issue for financial stability. If you read our FSR, however, you know that that would take a really big event for it to get to that point.

Yes, we think about it, but the factors that might lead to these big price increases often are not treated as well as they could be by an increase in the interest rate. An increase in the interest rate would affect the whole country, including whole provinces where this isn't an issue at all. It's quite a widely spread instrument when we use it, and it's very effective. At the same time, you could look to other policies that are actually much more effective and more targeted. We saw some of them in action last year in Vancouver.

Another point we've made is that if you think you're investing and you're going to get a 20% or 30% return, it's not clear to us that raising the interest rate—a difference in an interest rate of 50 basis points or 200 basis points—is really going to change your mind on a rate of return that's really that lucrative. You combine this with the fact that, if you look at our credit numbers, it's actually not a credit-driven price cycle at this point.

I would say that the monetary policy tool would be the wrong one at this point.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you very much for your comments on that.

You mentioned the debt-to-income ratios of Canadians. There is obviously a lot of concern when Canadians are stretching themselves a bit too thin. It's happening a lot in our neck of the woods. If a middle-income family has a home in Brampton East that they probably bought for $550,000 to $600,000, that home might be worth a million dollars, and that's only in the last four or five years. Now they've taken out the equity and put down a deposit on two or three homes. At the same time, they have two SUVs they have financed, and they might have a kid they're paying tuition for in college or university.

To me this is the biggest risk to the housing market, because people are then going into the secondary market to close on these deposits they've made on homes that haven't been built yet in order to close on the mortgages, and they're paying 12%, 13%. We don't have the data, and this never shows up in your debt-to-income ratio.

In your report you mentioned that it would be catastrophic to get to that point, as though we're now far from a housing crash. In certain regions, however, if that were the scenario, would it not present legitimate risks for the Canadian housing market? If something happened in Brampton or Toronto, wouldn't there be ripple effects all across the country?

[Carolyn Wilkins]

It's difficult to speculate. “If something happened“ is very general terminology. As to how much it would ripple across, it would be very unfortunate for the people in that area, and I don't want to minimize that at all.

What we've seen when you look at past housing price cycles is the amount of contagion depends on a couple of factors. One of them is just how big the price adjustment is in that particular area and how important that area is to the rest of the economy. If it's relatively small, then contagion is probably a low risk. If it's quite large, however, particularly in an area like the GTA and Brampton, I would say that the chances are higher that there would be contagion to other markets, because it would affect price expectations in other markets. It really would just depend.

Whether or not this would lead to a very large macro-economic cycle, a recession, would again depend on what else was going on in the environment. If the economy were still growing and benefiting from growth in the U.S., that would be one case. If, at the same time, there were some negative events from outside that amplified that price adjustment, then it could create some macro-economic problems.

[The Chair, Liberal, Wayne Easter]

Thank you both. I'll have to stop it there.

Mr. Dusseault, you are down to three minutes.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Then we'll go back to you for five minutes.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

I would like to quickly go back to the question of the dollar. In my constituency, Sherbrooke, in the Eastern Townships, we are very close to the American border.

Does your model project that the value of the Canadian dollar against the American dollar will remain stable at more or less at the current value in the coming months and years?

[Stephen S. Poloz]

No. We do not make forecasts for the Canadian dollar. In the report we published today, we assume that the Canadian dollar will remain stable through the entire forecast period. As I mentioned before, a number of things make it very difficult to do. I must tell you frankly that, if we make a projection, it will influence the market. We prefer the market to behave normally, completely on its own.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you for your answer.

My concern is that the population is aging. I do not know if you have any projections or data on the matter.

We hope that most people will have saved for their retirement, but some data show that savings are perhaps not top of mind for a lot of people who are approaching retirement.

Do you have any data on Canadians' savings? Do you have any data on the potential risk to the economy of soon having a large number of new retirees with no savings and no ability to remain fully active consumers in the market?

[Carolyn Wilkins]

We look at the overall rate of savings in the economy. At the moment, that rate is about 5%. When you look at the savings of older Canadians, there is a whole range of possibilities. Some people are finding themselves in a situation where they need to work a little longer. We have not gone into that matter in depth.

We can say that, in the labour market, we can see that the level of activity for older people has increased. People are working longer than was normal in the past. With the data at our disposal, it is difficult to say whether those people are making that decision because they like to work, because they are in better health and living longer, or because they are in financial need.

[The Chair, Liberal, Wayne Easter]

Thank you, Pierre.

Mr. Ouellette, you have five minutes.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Thank you, Mr. Chair.

My thanks to the witnesses for coming to the committee today. It is kind of you.

The Bank of Canada is responsible for monetary policies, financial systems and financial management.

I was just wondering what tools would be available to the Government of Canada and the Bank of Canada if there were a major disruption in our economy, for instance—not the American economy, but our own economy. If there were large unemployment, what would you be able to do in addition to what you're already doing with a low interest rate, in order to get more people back to work, for instance?

[Stephen S. Poloz]

The tools of economics have not really changed in all these years. Canada's federal system is in a very strong financial situation, and we would be able to deploy fiscal tools in order to stimulate the economy.

On the monetary side, we're already at a very low interest rate. That would be of some concern, that we would start with a low rate—

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

That would be something that would be excluded, because we're already at a low interest rate.

[Stephen S. Poloz]

No, I'm just finishing my thought.