Evidence of meeting #37 for Finance in the 43rd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was bank.
A recording is available from Parliament.
Senior Deputy Governor, Bank of Canada
You will recall that we set this program up to purchase bonds of a term of maturity of between one and 10 years across all the provinces up to $50 billion. To date, we have purchased $3.5 billion worth of these securities through a third party asset manager.
Conservative
Michael Cooper Conservative St. Albert—Edmonton, AB
Okay. Could you also provide an update with respect to the bankers' acceptance purchase facility? ?
Senior Deputy Governor, Bank of Canada
With respect to bankers' acceptances, again this was set up early on when markets were not functioning very well and we agreed to purchase a certain amount per week of bankers acceptances. Right now, we have only $3.7 billion on our balance sheet. Many of our purchases have matured and peaked at around $47 billion.
The reason we don't have many more left is that they've matured and markets aren't interested in providing us with any. When we go out every week to buy a certain amount, they're not being offered, because the market is working extremely well. That's why, as Governor Macklem said earlier, we've been able to scale back some of these programs, including the bankers' acceptance program, as market conditions have improved.
Conservative
Michael Cooper Conservative St. Albert—Edmonton, AB
What about the commercial paper purchase program?
Senior Deputy Governor, Bank of Canada
The commercial paper purchase program is $1.7 billion right now. It peaked at $3.6 billion. Again, it's the same story.
Senior Deputy Governor, Bank of Canada
It was very important at the beginning, but if you look at spreads and market activity, it's improved quite a lot.
Conservative
Michael Cooper Conservative St. Albert—Edmonton, AB
Okay. Thank you for that update.
I want to ask the governor to comment a little more broadly on the issue of household debt, which the governor has commented on already during this hearing. The bank issued a report in May that raised serious concerns about household debt being likely to rise. It was noted at the end of that report that the number of vulnerable households, those putting more than 40% of their income towards paying off debt, is likely to rise due to the economic circumstances arising from the pandemic. It's been about a month since that report. Would you care to comment on that serious issue, especially at a time when we see that the household debt ratio has reached 176.9% according to Statistics Canada, which is close to an all-time high?
Governor, Bank of Canada
Yes, I can give you a bit of an update.
Debt is a stock, so it doesn't usually change really rapidly, but I think that we've seen two things in the last month that are affecting this.
On the one hand, as I indicated, thanks in large part to the government's fiscal programs, particularly the transfers to households—they have replaced the income lost from COVID-19, and people are buying less—we've actually seen some increase in the savings rate, and some households are using that to pay down their debt. We're seeing that the rate of growth of household credit has come off. On the other hand, the denominator in that ratio—household debt over disposable income, of course—is falling because people are losing their jobs, and their disposable income may be going down. Again, the government is replacing much of that, so hopefully disposable income will be going down much less than GDP—let's put it that way. There are these two things going on, and we'll have to see how they evolve going forward.
Liberal
Conservative
Liberal
Liberal
Julie Dzerowicz Liberal Davenport, ON
Thank you so much.
I also want to extend my congratulations, Governor Macklem. Thank you for taking on this important role, and thank you for your important service to our country at this time.
I have two questions for you.
Mr. Cooper started asking some specific questions around the new program to support provincial funding markets, and Ms. Wilkins gave a wonderful reply.
It's the first time that the bank has ever offered this program. Is there any worry from you that a big take-up by the provinces would actually have any type of an impact on Canada's overall debt-to-GDP ratio?
Governor, Bank of Canada
Well, let me just say a few words about the design of this program because I think it speaks to how you manage risks.
An important feature of the design of the program is that our purchase program is designed to be relatively neutral across the provinces. The purchases are aligned to reflect both the size of the province and the historical pace of issuance of the province. That creates a reference portfolio. What we purchase won't be exactly on the reference portfolio because it depends on what's available, but it should be pretty close. The idea is that it's not targeting any one province, that it's not trying to help one province more than the other. It's really designed to ensure liquid funding markets and to ensure that provinces have access to markets and can borrow.
The other element of that program is that, like the corporate bond program that Senior Deputy Wilkins just talked about, reducing the spreads relative to the Government of Canada curve improves the transmission and effectiveness of monetary policy.
Liberal
Julie Dzerowicz Liberal Davenport, ON
Okay. Perfect.
Canada, as we know, is a huge country with a small population and relatively small economy, so we very much rely on external markets as well to be successful from an economic perspective. What are you keeping an eye on internationally, globally, with other G7 countries, that you're kind of worried about or monitoring that might have an impact on Canada either in a positive or negative way?
Governor, Bank of Canada
It is worth highlighting that trade is a big part of our economy. As you highlighted, we're a relatively small economy, and in order for us to compete effectively globally, it makes sense for us to achieve critical mass in some areas and import goods in other areas.
There's no question that global supply chains have been severely disrupted by this crisis. Companies are rethinking their supply chains. They're looking to shorten their supply chains. They're looking to improve the resilience in their supply chains. That's going to affect trade.
More broadly, for a number of years now, we have seen increasing trade tensions. Canada has been managing that reasonably well. Canada actually is almost unique in the sense that it has a trade agreement with Europe, it has one with the United States, and it's part of the new TPP.
Nonetheless, there is a risk in this crisis that countries look increasingly inward and protectionism increases. That is certainly a concern. It's going to be important for Canada to have a voice at the international table.
The reality is that we're probably going to have to be a little more reliant on internal growth, at least for a time, than we have been in the past. That's one of the structural features we're going to need to make sure we understand at the Bank of Canada.
Liberal
Green
Elizabeth May Green Saanich—Gulf Islands, BC
Wayne, you're so generous today.
First of all, to Governor Macklem, I add my congratulations and welcome to a critical role at this critical time.
This is a little different direction than some of my colleagues have taken, but I want to ask you about modern monetary theory and how you see this affecting us as we come out of the pandemic. Modern monetary theory seems to imply that sovereign insurers such as Canada need not have too much fear about large deficit as long as the debt is held within the country.
I wonder how you think this might affect the position of large international borrowers like many of the developing countries and whether we might anticipate some type of debt forgiveness such as the jubilee year suggestions of some years back, as the COVID crisis will really impact the poorer nations far more and their ability or inability to repay foreign lenders.
Governor, Bank of Canada
There are a few things in there. Let me try to take them in turn.
With respect to modern monetary theory, I'm sorry if I'm going to disappoint you, but I'm not a big fan.
Governor, Bank of Canada
Our extraordinary actions are very much anchored in our inflation target. They are anchored in doing and providing the monetary stimulus that is needed, providing the market funding in the face of a liquidity crisis to support the economy and close the output gap, get the economy back and keep inflation on target.
The difficulty with modern monetary theory is that is has all sorts of objectives, and while they may be worthwhile objectives, monetary policy is not the way to achieve them.
With respect to issues of debt forgiveness, I will highlight that we are incredibly privileged in this country. We are a very rich country. As difficult as this is, it's way more difficult for many emerging market countries. They have nowhere near the capacity to provide the type of stimulus that we are able to put in place to support Canadians. Their health systems cannot cope with this crisis.
These are really decisions for the government, and governments globally, but I think one of the issues going forward is going to be, how does the world support countries that don't have the resources to deal with this?
The IMF is certainly putting in place new programs, as is the World Bank, and we participate in those forums. It is a big issue.
Green
Elizabeth May Green Saanich—Gulf Islands, BC
You've raised the issue of the World Bank and the IMF. I'm attracted to the notion that, post-pandemic, we can actually ask some big questions. As you said, this is unprecedented as an economic hit, certainly, and not just in our lifetimes, but a while back.
I'm wondering whether you think there's any attraction among other central banks and policy-makers around the world to really think in terms of something on the scale of a new Bretton Woods and sit down and ask if we want to look at the role of the World Bank and of the IMF, which was obviously originally established to set currency rates—it doesn't do that anymore—and also at the larger questions of how we structure our arrangements in a global economy in order to better meet the need for stimulus to get economies back up and staying stable post-pandemic.
Governor, Bank of Canada
I will say that this pandemic has underlined once again that many of our biggest challenges are global, whether it's climate change, whether it's a global pandemic or whether it's global financial stability, which we had to confront 12 years ago. We cannot solve these problems one country at a time.
I worry that the lesson some people are taking from this is that we need to close our borders and look inward. I think that actually the lesson is the opposite. We cannot solve these problems on our own. We are going to have to find mechanisms to work together more effectively and more co-operatively globally. For Canada, that's particularly important. We're not a big country, as others have underlined, and the global rules-based system has served Canada very well.
