Finance Committee on April 27th, 2021

[The Chair, Liberal, Wayne Easter]

We will call the meeting to order.

Welcome to meeting number 37 of the House of Commons Standing Committee on Finance. Pursuant to Standing Order 108(2) the committee is meeting to study the report of the Bank of Canada on monetary policy and the economic and fiscal outlook.

Today's meeting is taking place in a hybrid format, pursuant to the House order of January 25, 2021. Therefore, members are attending in person in the room and remotely using the Zoom application. The proceedings will be made available via the House of Commons website, and as most everyone knows now, the website will show the person speaking rather than the entirety of the committee.

Based on the experience in the House, it's just as well not to take a screenshot of the proceedings.

With that, we will welcome our first guest, and before I get to the Governor of the Bank of Canada, I will give you a heads-up on the question list. In the first six-minute round, the first one up will be Mr. Poilievre, followed by a split between Julie Dzerowicz and Annie Koutrakis.

Turning then to the Governor of the Bank of Canada, Mr. Macklem, welcome.

You've been here before. It's a pleasure to see you again.

The floor is yours.

[Tiff Macklem, Governor, Bank of Canada]

Thank you, Chair. I hope you can hear me well.

Good afternoon to you and to all the committee members. I am very pleased to be back with you to discuss our monetary policy report, our economic outlook and the actions we're taking to support the recovery.

If I had to sum up the message for you in three words, these would be progress, time and commitment.

First, the economy is making good progress. Canadian households and businesses have shown impressive resilience to the pandemic. The economy is doing better than we expected. And with more and more Canadians getting vaccinated, we anticipate better times ahead. Reflecting these developments, last week, we revised up our outlook for the Canadian economy.

But second, a complete recovery will still take some time. The third wave of the virus is a new setback. It is straining health care systems in many regions and again hitting sectors where physical distancing is difficult. Important parts of the economy remain very weak, and too many Canadians are still unemployed.

Third, the bank remains steadfast in our commitment to support Canadian households and businesses through the full length of the recovery. For working Canadians, a complete recovery means a healthy job market with good opportunities, and that includes low-wage workers, women and young people who have been hit hardest by this pandemic.

A complete recovery means that companies have confidence that the pandemic is over and are investing to seize new opportunities. For households and businesses, a complete recovery means that they can count on inflation being sustainably at our 2% target.

Let me expand on these themes. At the time of our last MPR in January, Canada was facing a second wave of the pandemic, and we expected the economy to contract modestly in the first quarter of 2021. As it turns out, it now looks like the economy grew strongly in the first quarter. This is partly because the global economy is stronger, particularly in the U.S., but the most important factor is the resilience and adaptability of Canadian households and businesses. They have found new ways to shop, serve customers and work remotely.

As a result, lockdowns through the second wave had much less economic impact than they did through the first wave, and as restrictions were eased, the economy bounced back with substantial job gains in February and March.

Housing construction and resales have been particularly strong, rising to historic highs. This is being driven by a desire for more living space, low mortgage rates and limited supply, but we are seeing signs of extrapolative expectations in some housing markets, and there are risks that some households may overstretch financially. We'll continue to watch this closely.

With vaccination progressing, we are expecting strong consumption-led growth in the second half of this year. Fiscal stimulus from the federal and provincial governments will also make an important contribution to growth. Strong foreign demand and higher commodity prices are expected to drive a solid rebound in exports and business investment, leading to a more broad-based recovery. We now project that the economy will grow by around 6.5% this year, about 3.75% in 2022 and 3.25% in 2023.

With this improved outlook, we're hopeful that there will be less labour market scarring and less lost capacity than earlier feared, and we have revised upward our estimate of the economy’s potential output. But I want to emphasize that considerable uncertainty surrounds our estimate of potential. As the recovery continues, we will be paying attention to a broad spectrum of indicators of slack, including a range of labour market indicators.

Last week, we saw that inflation rose slightly above our 2% target in March. This increase was expected. Indeed, over the next couple of months, we anticipate inflation will rise further to around the top of our 1% to 3% inflation-control target range. This largely reflects base-year effects combined with the recent rise in gasoline prices.

Governing council is looking through these temporary increases in inflation because we expect the ongoing excess supply in the economy to pull inflation back down. Inflation should return to 2% on a sustained basis as slack is absorbed in the second half of 2022.

Taking into account the improved economic outlook and the considerable slack that remains, the governing council judged last week that the economy still needs extraordinary monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. As I just mentioned, based on our latest projection this is expected to happen sometime in the second half of 2022, although this timing is unusually uncertain, given the difficulties in assessing the economy’s supply capacity.

Our forward guidance on the policy rate continues to be reinforced and supplemented by the bank’s quantitative easing or QE program. Effective this week, we adjusted our weekly purchases of Government of Canada bonds to a target of $3 billion, down from the previous minimum of $4 billion. This adjustment reflects the progress we've already seen towards economic recovery.

Before I turn to your questions, let me say a few words about our QE program and its impact on our balance sheet, as I know this is a topic of interest to many committee members.

Around this time last year the bank launched a number of extraordinary programs—11 in all—to help restore functioning in financial markets and keep credit flowing. These programs worked, and with markets now functioning well we have wound down or announced the termination of all but one of our extraordinary programs. The one remaining is our QE program. It is still providing needed monetary stimulus by lowering borrowing costs for households and businesses across the yield curve.

With the other programs winding down and QE continuing, the size and composition of our balance sheet has shifted in the past several months. The size of our balance sheet peaked back in February at about $575 billion. It has since decreased to about $475 billion. This decline reflects the maturing of some of the shorter-term assets and the termination of most of our extraordinary programs.

We continue to buy Government of Canada bonds to provide stimulus in pursuit of our inflation objective. The bank currently holds about $354 billion of Government of Canada bonds, comprising more than 70% of the assets on our balance sheet. This is up from 55% last January.

I’ve provided you with a chart that shows the evolution of our balance sheet and a table that provides more detail on the maturity composition of our holdings. As you can see from the table, the Bank of Canada currently owns just over 40% of the outstanding stock of Government of Canada bonds.

Across the maturity spectrum of nominal bonds, our ownership ranges from 48% of five-year bonds to 36% of 10-year bonds. We routinely make available high demand bonds through our securities lending program, and this helps promote the smooth functioning of Canada’s government bond market.

I’ve given you a lot of numbers. The message I want to leave with you is that our purchases have provided a lot of stimulus to the economy. With the progress toward economic recovery that we've already seen, we have adjusted the amount of incremental stimulus we are adding each week with our purchases. Looking ahead, further adjustments to the pace of net purchases will be guided by our ongoing assessment of the strength and durability of the recovery.

If the recovery evolves in line with or more strongly than our latest projection, the economy won’t need as much QE stimulus over time. Further adjustments to our QE program will be gradual, and we will be deliberate in our assessment of incoming data and our communication of our analysis.

We remain committed to providing the appropriate degree of monetary stimulus to support the economy and achieve our inflation objective.

With that, Mr. Chair, let me stop and address the committee's questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Governor.

Starting with a six-minute round is Mr. Poilievre, followed by Ms. Dzerowicz.

[Pierre Poilievre, Conservative, Carleton, ON]

Governor, I was fascinated to hear you say that the purpose of your quantitative easing—that is, these mass purchases of government bonds—was to help households and businesses, but you didn't mention that it was designed to help governments spend borrowed money.

On April 19, the Minister of Finance introduced a budget that proposed a deficit of $154 billion. That works out to $3 billion a week. That's how many dollar-value worth of bonds the government will have to sell.

How much are you proposing to buy every single week, and just the number, please?

[Tiff Macklem]

Right now, we're buying $3 billion a week.

[Pierre Poilievre, Conservative, Carleton, ON]

What a coincidence. The government is going to be selling three billion dollars' worth of bonds per week, and you're going to be buying $3 billion a week.

Mr. Chair, it is a miracle. What a coincidence that those two numbers line up so closely. You announced that $3 billion number exactly two days after the minister laid out the same number in her budget.

Is that a pure coincidence?

[Tiff Macklem]

Our purchases of government bonds are guided by our inflation target. We have seen considerable progress in the recovery. We don't need as much quantitative easing, and that's what guided our decision to reduce the number of purchases.

[Pierre Poilievre, Conservative, Carleton, ON]

Right.

On an annual basis, the government will borrow a net $154 billion, and you will provide a net $156 billion, so there is an extra $2 billion. Keep the change, Mr. Government. That has to be a coincidence, but you're saying no, the purpose of this was the inflation target.

Three of your four measures of inflation are now above the target, which would presumably mean you would pull back. Even The Financial Post said, “Central banks and government out of touch with Main Street when it comes to rising cost of living”.

Canada's food price report shows that food costs increased almost 3% last year, with an expected increase of almost 7% in meat, almost 6% in bakery and almost 7% in vegetables, not to mention housing prices are up more than one-third in just over a year.

I think we have enough inflation, Mr. Governor. Why do you keep printing money?

[Tiff Macklem]

It's really quite straightforward. We're in an economy that still has major parts that are very weak. There are still far too many unemployed Canadians. There are large parts of the economy that remain well below their capacity. That is all putting downward pressure on inflation.

To give you a picture in terms of actual Canadians, we're still 300,000 jobs below where we were pre-pandemic. For more than a year, Canadian students who have graduated and Canadians who have entered the labour force, it's about 500,000 below the pre-pandemic level.

That is putting downward pressure on inflation. We are committed to supporting the recovery, getting Canadians back to work, and that is critical to get inflation sustainably at our 2% target. That is what is guiding our policy decisions.

[Pierre Poilievre, Conservative, Carleton, ON]

Mr. Governor, I have no doubt that unemployment is high. The job market is terrible, but inflation is high too.

You admitted today, for the first time, that you're going to bump up on 3% inflation. That is something you told us, and your predecessor told us, was not possible, when you first testified about this quantitative easing program only a year ago.

The people you claim to be helping, low-wage workers, women and young people, are the victims of inflation. You have admitted at this committee that the poor, the young and the dispossessed are disproportionately harmed by inflation, because they deal more in cash and because they don't own assets that inflate.

Why are you, once again, pumping billions of dollars into the system to inflate the things that the rich own, but that the poor have to buy, thus widening the gap between rich and poor?

[Tiff Macklem]

Let me clarify a couple of points.

First of all, we are committed to achieving our 2% inflation target. That, as you highlighted, is important, particularly to low-income Canadians because they tend to hold more cash than other Canadians, so they suffer more from inflation. It is really important, and we have a very strong record over the last 30 years of achieving our 2% inflation target on average. We absolutely intend to continue that.

Second, as I've highlighted and as you've mentioned, there are many unemployed Canadians. There are far too many Canadians out of work.

[Pierre Poilievre, Conservative, Carleton, ON]

With respect, Governor, my question—

[Tiff Macklem]

The best thing we can do to help those Canadians is to get them back to work.

[The Chair, Liberal, Wayne Easter]

Ask your last question, Pierre.

[Pierre Poilievre, Conservative, Carleton, ON]

Printing cash won't do that. Your method was tried in the early eighties and it led to stagflation: high unemployment and high inflation. You claimed that this money printing was about restoring the functioning of markets, but credit and capital markets are flush with cash more than ever before. You claim it's about getting to the 2% target, but we're already over the 2% target.

The only thing that makes any sense is that you're printing about exactly the same amount of money that this government needs to borrow. However, by funding the government with printed money, you're making housing unaffordable for young people in my riding, and you're making food and other essentials unaffordable for seniors and the poor. This policy has to come to a—

[The Chair, Liberal, Wayne Easter]

Where is your question here?

[Pierre Poilievre, Conservative, Carleton, ON]

Mr. Chair, will the governor commit that he'll stop printing money and giving it to the government once we hit 3% inflation, yes or no?

[Tiff Macklem]

With respect, our policies are working. This is a bad third wave, and we need to get through this, but we have seen impressive resilience in this economy. That has a lot to do with the adaptability and resilience of Canadians. It also has a lot to do with the fiscal and monetary supports that have been provided. This economy still has some way to go before we hit that complete recovery, and what we are committed to doing is supporting the economy through the full length of the recovery to get inflation sustainably back on target.

[The Chair, Liberal, Wayne Easter]

Thank you, both. We're a little over.

We'll turn to Ms. Dzerowicz, who will split her time with Ms. Koutrakis.

Julie.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

I want to thank the governor for being here. Thank you so much for making time today, and thank you so much for your service to our nation during these unprecedented times.

I'm going to continue the conversation around our labour market. As you mentioned, it has been remarkably resilient. You also mentioned that, despite the fact that we've actually had substantial job growth over the last couple of months, it still remains very difficult for many Canadians, particularly low-wage workers, young people and women. Our federal budget 2021 has invested significantly in these three key groups.

Can you talk to us about how focusing and investing in these groups is good economic policy?

[Tiff Macklem]

Before I go any further, let me just underline that I am here as the Governor of the Bank of Canada to talk about our outlook, monetary policy and the actions that we're taking. It's not my role to comment on the government's budget and the individual measures. What I am prepared to talk about are the implications of fiscal policy for monetary policy. We take federal and provincial budgets, and we build those into our own projections. Certainly, over the last year through this pandemic, the fiscal supports from the federal government and from provincial governments have been instrumental in supporting Canadians. As I underlined in my previous answer, while we still have a considerable way to go, this combination of fiscal and monetary policy is working.

There is a range of measures in the budget. The budget came out, obviously, two days before our monetary policy report, so we don't have every detail in there, but from a macro perspective, we have included the essential features of the federal budget. That is built into our projections. The support that is provided in the budget is built into those projections.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

I'll ask one more question before I turn it over to my colleague.

What would you say at this point are the key risks to the Bank of Canada's economic projections, and how do they compare to those of the IMF and OECD, which are actually quite favourable?

[Tiff Macklem]

Look, the biggest risk is clearly the evolution of the pandemic itself. This third wave is straining our health care systems. It is requiring new public health measures and new containment measures. Unfortunately, that's putting some of the same people who have been hardest hit by this pandemic out of work again or delaying their return to work.

The good news is that vaccines are rolling out. I got my vaccination a couple of weeks ago. Roughly about 30% of Canadians now have a first shot, but we've seen that this virus is very unpredictable. There are new variants out there. That is certainly the biggest risk to the projection.

When you look at our projection, there are some upside risks as well as some downside risks. Canadians have accumulated a substantial amount of excess savings through this pandemic, which I can go into detail on. We're assuming, based on what Canadians have told us, by and large, that.... We expect Canadians to reduce their savings rate to where it was pre-pandemic, again, in consumption, in consuming again at the same sort of rate that they did before, but we are assuming that the extra accumulated savings that they've built up will be used to pay down debt, invest or buy houses.

They could end up dipping into more of those savings, and consumption could be even stronger than our forecast, so there are upside risks and there are downside risks.

[The Chair, Liberal, Wayne Easter]

Okay.

We'll have to move on to Ms. Koutrakis.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much.