Finance Committee on April 16th, 2020

[The Chair, Liberal, Wayne Easter]

I will officially call the meeting to order.

Welcome to meeting number 19 of the House of Commons Standing Committee on Finance. Pursuant to the order of reference of Tuesday, March 24, the committee is meeting on the government's response to the COVID-19 pandemic. We're really meeting for the purpose of receiving evidence concerning matters related to the response to the COVID-19 pandemic and to consider a biweekly report to be provided by the Minister of Finance or his delegate on all actions undertaken pursuant to parts 3, 8 and 18 of the COVID-19 Emergency Response Act.

Today's meeting is taking place, as you're well aware, by video conference, and the proceedings will be made available via the House of Commons website. Just so you're aware, the website will always show the person speaking rather than the entirety of the committee.

In order to make the work of our interpreters easier, I would ask people to speak slowly and as clearly as they can, and that those who are not speaking to mute their phones. Before speaking, wait until the chair calls you. I have the speaking order here.

With that, we will start the meeting officially. I believe we will start with the Governor of the Bank of Canada, Stephen Poloz.

Governor, I want to thank you, first of all, on behalf of the committee for all the work you, the senior deputy governor, your board and all the folks at the Bank of Canada are doing these days to assist Canadians in getting through this crisis. We'll turn the floor over to you and then go to a round of questions.

Governor.

[Stephen S. Poloz, Governor, Bank of Canada]

Good afternoon, Mr. Chairman and committee members.

Senior Deputy Governor Wilkins and I welcome this opportunity to appear before you to discuss the bank's policy actions in response to the coronavirus pandemic, as well as our monetary policy report, which we published just yesterday.

The Canadian economy is experiencing a significant and rapid contraction. The shock affects all countries, but commodity-producing countries like Canada are being hit twice. Beyond the impact of the necessary public health measures to contain the virus, the economy is also being hurt by the plunge in world oil prices. In the very near term, public policy-makers can do little more than cushion the blow.

For the bank to achieve its primary mandate of keeping inflation close to target, the economy first needs to be stabilized. In recent weeks, the governing council lowered our policy interest rate three times to 0.25%, which we consider to be its effective lower bound. These moves were based on analysis of the factors we could measure immediately, mainly the likely fallout on the economy from the collapse in oil prices as well as the immediate effects of measures to contain the coronavirus. This preliminary analysis indicated that cutting rates all the way to the effective lower bound was the best contribution the bank could make to stabilizing the economy and complementing the government's extensive efforts to respond to the pandemic.

However, for the bank's monetary policy actions to reach companies and households and foster a robust recovery, it's crucial that financial markets function well. Therefore, the bank has so far taken many steps aimed at improving market functioning. Let me describe these programs and facilities and their intended purpose.

The market for Government of Canada bonds is foundational: It forms the basis for many other financial markets. Therefore, we launched a program to purchase at least $5 billion of these bonds per week to support the liquidity and efficiency of this market. In yesterday's announcement, the bank stressed that we can increase this program at any time, should conditions warrant it, and we announced that we will increase our participation in the federal government's treasury bill auctions to 40% of each new issue.

The bank is also helping to ensure proper functioning of provincial debt markets by buying up to 40% of new provincial money market securities and up to $50 billion of provincial government bonds.

We've taken a number of steps to ensure financial institutions have ample liquidity so Canadian businesses and households can continue to have access to credit to meet their basic needs and bridge this difficult period.

These steps include enhanced repo facilities, which allow banks and other primary dealers to borrow cash from us by using their assets as collateral, in order to help them better manage their liquidity risks. We have expanded the list of institutions that can access our lending as well as the types of collateral they can pledge, and these facilities can now provide funding for up to 24 months. We've also started a contingent term repo facility, which offers liquidity to a broader range of counterparties that are active in the repo market. Further, we have established a program to buy Canada mortgage bonds, up to $500 million per week. This is to support the healthy functioning of an important market for mortgage lending to Canadians. Together, all these facilities should improve liquidity and funding conditions for lenders, which will help companies and households have access to the credit they need. It will also help them benefit more from our monetary stimulus during the recovery period.

To support Canadian businesses, we started a program to buy bankers' acceptances, which are a key source of financing for many small and medium-sized companies. We also began the commercial paper purchase program, which provides financing for a wide range of businesses and public authorities. As well, yesterday we announced a program to buy $10 billion of high-quality corporate bonds in the secondary market.

As we said in our policy announcement yesterday, the bank stands ready to augment the scale of any of its programs should market conditions warrant it. With these programs in place, the combination of aggressive fiscal action by governments and monetary stimulus by the bank will create the best possible foundation for the recovery period.

It's the normal practice for the bank to provide a detailed economic forecast for the Canadian economy in our MPR and for us to discuss this forecast when we appear before this committee. However, the economic outlook is highly conditional on how long the containment measures remain in place and how households and businesses adapt. Given this, the bank decided that it would be false precision to offer a specific forecast in our MPR. Instead, we chose to offer two plausible illustrative scenarios for the economy. One of these should be thought of as a “best case”, which remains feasible depending on the length of the shutdown and other factors, while the other is a much more severe scenario. Many possible outcomes lie between these two. Regardless of the outcome, based on the bank's analysis, we concluded that substantial monetary stimulus needs to be in place to lay the foundation for the post-containment economic recovery.

I want to stress that all our actions so far have been entirely consistent with our inflation-targeting framework as set out in the agreement with the federal government. Inflation targets provide an anchor for the economy, particularly inflation expectations, and a guide for monetary policy actions. Keeping inflation close to our 2% target means setting monetary policy to stabilize the economy and returning economic growth and employment back to full capacity.

Before I conclude, let me just note that this is the last time that I'm scheduled to appear before this committee as Governor of the Bank of Canada. These appearances are an important part of the bank's accountability to Canadians, and I've always appreciated these occasions to explain our work to you and through you to the public. I thank you for your work in this regard.

With that, Senior Deputy Governor Wilkins and I would be happy to take your questions.

[The Chair, Liberal, Wayne Easter]

Thank you for your efforts and your work over the last years as well.

We will turn to MPs for questioning. I'll just give you the order first. For the six-minute round, first will be Mr. Poilievre, then Ms. Dzerowicz, then Mr. Ste-Marie and then Mr. Julian.

Mr. Poilievre, the floor is yours.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you.

As you've just stated, Governor, your bank is buying $5 billion a week of Government of Canada bonds and buying 40% of new Government of Canada treasuries. You said in your monetary policy report that this was because of strains the government was experiencing in raising new money and challenges in borrowing.

If the government's balance sheet is really as strong as you and others have claimed, why can't the government go on borrowing from willing lenders rather than having you create money from thin air to lend to it?

[Stephen S. Poloz]

First of all, we refer often to this notion of strains. The strains in the marketplace that we refer to are the actual functioning of the market. That pertains to the actual liquidity of the market: Can you sell a bond readily when you want the cash, or do you find there is quite a spread between bid and offer prices? It's a sure sign that a market is being disrupted when bid offer spreads widen out. It makes it very hard, for example, for mutual funds that are running bond funds to rebalance their portfolios, or for any investor who chooses to have cash instead of their bond to sell that, or for the borrower, for that matter, such as the government, to raise cash in the market when the market is not functioning as well as it should.

When there are increased liquidity demands, the most liquid assets that we have are Government of Canada securities. They are the places people turn in order to raise cash, so the market tends to get these strains.

I wasn't referring, then, to any issues at all about raising government money. What we did say yesterday was that the cash needs we see emerging in the near term are very likely to produce additional strains in the market. This is just a digestion effect. I don't see this as a credit issue.

[Pierre Poilievre, Conservative, Carleton, ON]

Right, but perhaps the spread between bid and offer is due to the fact that the market is demanding a premium in the rate that it gets from government securities, taking into account the risk the market sees in making those loans.

You did say in your monetary policy remarks that there were challenges for the government in seeking borrowing. I have the remarks right here.

[Stephen S. Poloz]

Yes.

[Pierre Poilievre, Conservative, Carleton, ON]

It just does seem a little bit strange that you have to pump this enormous amount of money into federal government bonds. You're now helping at a rate of a quarter-trillion dollars a year, annualized, in bonds alone. That doesn't include the 40% of the treasuries that you're buying. All of that suggests that the government cannot raise money on international lending markets at rates that it considers acceptable. That's why you by definition are creating it. If they could, they wouldn't need to come to you. So I just respectfully challenge the notion, which you and others have put forward, that governments can continue to borrow at this rate, and at the rates that they have been, without any consequences.

I turn the committee's attention to the overall indebtedness of Canada, because the economy has to support household, corporate and government debt. The question to you, then, is how much debt do Canadian households, governments and businesses owe combined?

[Stephen S. Poloz]

That's the question. We would normally measure that in terms of ratio to GDP. For the household sector, I would have to get the exact facts to you, but off the top of my head it's approximately 100% of GDP. It's like 170% of disposable income. That's usually the metric we refer to from a household sector point of view. I don't know about the corporate sector off the top of my head. The Government of Canada is about 30% of GDP, as we know, and provinces are larger than this as a share of GDP.

With respect to—

[Pierre Poilievre, Conservative, Carleton, ON]

So the combined indebtedness of Canadians is well multiples of the entire size of our Canadian economy.

[Stephen S. Poloz]

That's correct.

[Pierre Poilievre, Conservative, Carleton, ON]

That's another good reason we should reject the notion that we can just keep borrowing and borrowing. Eventually, our economy will not be able to support the abundance of debt that is being piled up here.

Moving to provincial debt, for which provincial governments have you had to come to the rescue so far or you expect to have to come to the rescue for in the immediate future?

[The Chair, Liberal, Wayne Easter]

Governor, you didn't quite complete your last answer there. If you want to take the time to finish the answer, do so.

[Stephen S. Poloz]

I'm not sure, out of all these comments, which ones I should treat as questions, Mr. Chairman, but I will go to the last question, I guess.

I can say that we have not come to the rescue of any provinces. We have been buying short-term securities from the market directly, as the provinces have been issuing them, as a form to add extra liquidity to the system. As I was saying before, the strains we are looking at are not strains related to borrower strain. The strains are that across the entire network or the entire system, everybody in times like this goes to more liquid positions. That's when they are selling their stocks, when they are selling their bonds and when they are adjusting their positions, just when they are drawing their credit lines. A firm with a committed credit line with their bank several weeks ago would see the trouble coming, draw their credit line right to the maximum and then just park the money.

Well, the banks have to fund that in some way. They don't just pull it out of their vault or their deposits. What they do is they go to the market to fund that. Those markets were jammed up because of so many people throughout the economy—and I'm talking about people—acquiring additional liquidity. It's the central bank's job in that situation to provide those needs. The way we do that is by acquiring the assets, the illiquid or relatively illiquid assets, that the market is providing up. Our balance sheet expands at that time, which is what central banks do. Then, at a future time when those tensions ease back, no one will need the liquidity. The firm that drew its entire $100-million credit line will put the money back, pay back the credit line, and then the bank will have all that money to put back out into the market. That's when those assets get reabsorbed. This is how a liquidity provision takes place.

[The Chair, Liberal, Wayne Easter]

Thank you both, and thank you for that explanation, Governor.

Ms. Dzerowicz.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much.

I just want to say a huge thank you to Senior Deputy Governor Wilkins and to you, Governor Poloz, for presenting to us today. As this is, as you mentioned, your last time before our committee, I want to thank you for your extraordinary service to Canada and I want to thank you for your leadership during this pandemic.

Governor, over the course of the last month you've taken some very significant measures to ensure that the financial markets in Canada continue to function and that credit remains available. I know you've adjusted the overnight rate a number of times and you've introduced a number of programs to increase liquidity in core funding markets. You've taken us through that today in your presentation.

Yesterday, as you mentioned, you presented your monetary policy report and you announced some additional support.

In my riding of Davenport, my constituents, like most constituents across the country, are worried and stressed during this pandemic. They're wondering whether life will ever go back to normal.

What should our constituents think about your announcements? What signal are you sending them?

[Stephen S. Poloz]

Given the narrative, of course, you're right. There's every good reason for people to be concerned and our job is to do everything we can so that they needn't be.

I'm going to ask Ms. Wilkins to walk you through our economic scenarios in just a moment. Let me just say that the comparisons that people are making to past episodes are actually in most cases quite unhelpful. This is a very unusual thing. It's closest, I think, to a natural disaster. What we are doing with our policies is finding various ways essentially to stop the clock so that we can wait out the pandemic and then restart the clock. In the interim, especially fiscal actions put a floor underneath people so that they're supported through that period and they have a bridge to normalcy, and that forms the platform for the recovery afterwards.

People should be reassured that we're using all the tools in our tool kit in order to provide this transition.

Carolyn, would you talk briefly about the scenario—we don't have a forecast—to explain how it comes together dynamically.

[Carolyn A. Wilkins, Senior Deputy Governor, Bank of Canada]

There are a lot of unknowns about how the recovery, when it comes, will unfold. We started into this in a reasonably good position. The unemployment rate was relatively low and the economy was starting to strengthen again after some weakness in the fall. The banks are in excellent shape. We see that there's every reason to believe that recovery could be starting over the summer once and if the containment measures are starting to be lifted slowly, and that that would continue into the fall.

Of course, that all depends on the timing of the containment measures. In one of our scenarios, we assume that starts to happen in May and June. Your constituents and other people across the country will start to see that those businesses that were deemed non-essential will start to open. Not all of them will, but many of them will. People will start going back to their jobs or being hired, and their hours will become longer. That will create what I would call a virtuous circle that would underpin confidence.

As the governor said, the programs being put in place today by the government—for example, the wage subsidy or help for paying rent and other things—are really designed to put a floor under that confidence, so then when things start to open, we can start to get back to normal. Programs that we put in place to shore up liquidity and credit may seem very remote to people in your constituency, but in fact they're just essential. These programs ensure that, if they need their line of credit or they need to have some forgiveness on their mortgage payments, the banks are in a position to do that. It's not guaranteed, but at least they're in the position.

I'd like to finish by saying that the one thing we should note is that there has been also a large drop in oil prices, which means that part of the recovery might take longer depending on what happens to oil prices. We think a lot of that is due to the COVID virus. Those prices should firm up over time, but we think with inventories as high as they are, that could take a bit longer.

[The Chair, Liberal, Wayne Easter]

Make it a fairly quick question, if you could, Julie.

[Julie Dzerowicz, Liberal, Davenport, ON]

Mr. Poilievre was mentioning the debt levels in Canada. I know, Governor, that you are in touch with other G7 countries as well.

Can you relay to us how our economy is doing and functioning versus other economies as we're all going through this pandemic?

[Stephen S. Poloz]

We have very little by way of data on how economies are faring yet, but they all seem to be faring similarly in terms of how much of a shutdown is happening and what it does to the economy.

However, not every government has the same amount of firepower available, I would say, so that varies a bit from country to country. Certainly in our case, as Ms. Wilkins just mentioned, we started this whole episode with our economy operating at full employment, at capacity, and inflation on target, which was not something that was shared by many other countries. Just as a person who's healthy and fit has a better chance of shaking off the COVID virus, a healthy and fit economy has more resilience as we go forward.

In that sense, the federal debt-to-GDP ratio is quite low, among the lowest, so I think we walked into this with that sense that we knew fiscal policy would be able to rise to the occasion, knowing full well that monetary policy had very little ammunition at its disposal.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much.

[The Chair, Liberal, Wayne Easter]

We'll turn next to Mr. Ste-Marie.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Good afternoon, Ms. Wilkins and Mr. Poloz. I want to thank you for joining us at the Standing Committee on Finance.

My first question concerns the duration of your programs. In particular, I want to know what signals will prompt the Bank of Canada to slow down or end its programs. The financial sector and the economy as a whole must know the signals and indicators that will lead to the withdrawal of these programs.

As you know, it's important not to act too abruptly and create unnecessary stress.

[Carolyn A. Wilkins]

Thank you for your question.

Of course, we'll take into consideration the same signals as we did when we set up these programs.

With respect to term repo operations, we noticed liquidity issues in the short-term funding markets. These issues were seen in risk premiums, in supply and demand, and in the way the market worked.

As the economy and financial markets recover, there will be less need for our services. That way, we can slowly withdraw these services. That's exactly what we did during the 2008 crisis. We were able to gradually cut these programs.

The same applies to our asset purchases. In terms of private sector asset purchases, at some point, the market will start working fairly well. This will be reflected in the level of activity, in supply and demand, and in prices.

Regarding federal government bond purchases, we've already said that we'll keep them in place until the recovery is well established and well under way.

Based on the experience of other central banks, we're well aware that the exit from the crisis should proceed smoothly. Otherwise, as you said, this could create turmoil in the market.