Finance Committee on April 27th, 2021

[The Chair, Liberal, Wayne Easter]

You have about two minutes, Annie.

[Annie Koutrakis, Liberal, Vimy, QC]

Thank you, Mr. Chair.

Welcome, Governor Macklem. It's nice to see you at the finance committee again.

Governor, in your opinion, are we on the right fiscal and monetary path? How can you assure Canadians that the Bank of Canada can prevent a negative outcome of inflation and high interest rates?

[Tiff Macklem]

There are really two questions there.

On the first one, I don't see it as my role to opine on fiscal policy.

I will say in terms of the budget that it lays out a track for spending. Underlying the budget is a forecast that is an average of private sector forecasts. That forecast is not that different from the forecast that we published last week. We are actually a little bit stronger. Our forecast is a bit stronger this year, which I think largely reflects the fact that the data coming out in the last month or so has been fairly positive, but for next year or the year after, the forecasts are fairly similar. These are forecasts. As I just highlighted, there are risks around them, but it's a reasonable planning basis.

In terms of your own assessment as parliamentarians of the fiscal track—and I know you're speaking with the Parliamentary Budget Officer—I think you want to look at international comparisons. We were fortunate in Canada to go into this crisis with the lowest net debt-to-GDP ratio, and we will still be retaining that position. The other thing you can do is look at credit rating agencies. Yesterday, S and P reaffirmed Canada's AAA rating. Different agencies have different assessments. Those are I think all good resources at your disposal.

With respect to the Bank of Canada, which is really what I want to talk about, what can we do to assure Canadians that we will control inflation? We have a very clear mandate. We have a strong record now of 30 years of inflation targeting, and we have consistently realized that objective. I can tell you that as governor I am committed to getting the economy back to its potential output, with inflation sustainably at 2%. As I said, we still have some way to go, but we're closer than we were the last time I was in front of this committee.

[The Chair, Liberal, Wayne Easter]

Okay.

Thanks very much, all of three of you.

We'll turn now to Mr. Ste-Marie, who will be followed by Mr. Julian.

You have six minutes, Gabriel.

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

Thank you, Mr. Chair.

Good afternoon, Mr. Macklem.

Here's an excerpt from an article by Nouriel Roubini:

Central banks have been monetizing large fiscal deficits in what amounts to “helicopter money” or an application of Modern Monetary Theory. At a time when public and private debt is growing from an already high baseline (425% of GDP in advanced economies and 356% globally), only a combination of low short- and long-term interest rates can keep debt burdens sustainable. Monetary-policy normalization at this point would crash bond and credit markets, and then stock markets, risking a recession. Central banks have effectively lost independence.

What is your reaction to those comments?

[Tiff Macklem]

I am very confident in our independence. As I already pointed out, our policy is focused on our inflation target. That is our guiding light. We have already shown that, when the situation changes, we change our policies. When we implemented the quantitative easing program, we were buying $5 billion in bonds a week. We reduced those purchases a first time, from $5 billion to $4 billion, and we changed the bond mix to have more long-term bonds.

In addition, last week, we reduced the minimum target from $4 billion a week to $3 billion a week. That reflects the progress we have already seen in this recovery. We will continue to adjust as needed to achieve our inflation target.

So I have no concerns about our independence. Those are indeed extraordinary tools. This is an extraordinary policy, and we find ourselves in extraordinary circumstances. However, I think we have shown that we will adjust our measures to meet the needs of the economy, without doing too much.

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

Thank you for your answer. It is also nice to hear you answer in French. We are seeing the Montrealer in you.

I would now like to hear you comment on Ben Bernanke's analysis. Feel free to correct me if I am reporting his comments incorrectly.

He said there was an excess of savings and too low of an investment level globally, which would lead to low interest rates and low inflation.

Do you agree with that?

[Tiff Macklem]

When Ben Bernanke was a professor at Princeton University—he's still actually a professor—he wrote a series of important articles on what he referred to as the global savings glut. In other words, this means there is an excess of savings in the world and not enough investment projects. That is why we have seen a downward trend in long-term interest rates. A number of factors are involved, but population aging in a number of countries is one of the factors that stand out. This leads to a savings glut compared with demand in investment. When there are more savings and less investment, interest rates are lower.

The reason why that affects monetary policy is the implication that we will probably reach the effective lower bound of our key interest rate more often. That suggests that we will need, as is the case now, to use other tools, such as quantitative easing, to strengthen our forward guidance in relation to our key interest rate.

So I do think that is an important study.

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

Thank you.

Should another extraordinary crisis occur, would you go as far as to consider using negative interest rates?

[Tiff Macklem]

Negative interest rates are a tool we can use. We don't think that is necessary right now, and I don't expect us to need them. Should the situation change to an extreme degree, we could in fact use that tool.

The bar is pretty high before we would go to negative rates.

I would like to add one last thing. To help us with the renewal of the inflation-control target framework, we have surveyed Canadians to better understand their opinions. That was a very worthwhile initiative. There were differences of opinion, but, overall, we learned that Canadians encourage the use of the quantitative easing policy, but they don't really like the idea of negative interest rates.

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

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

Peter Julian, the other three got seven minutes each so you will have seven too, and then we'll go to Mr. Fast.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thanks very much, Mr. Chair.

Thank you, Governor Macklem, for being here today. Your availability over the course of this pandemic has been very important, and we thank you for that.

I have a couple of questions around both the Bank of Canada's mandate and the implications on monetary policy of fiscal policy, which you mentioned earlier. We know that it really is a tale of two countries. During this pandemic we have seen Canada's billionaires increase their wealth by $78 billion so far. We've seen massive profiteering in certain sectors and we have seen some Canadians, wealthier Canadians, being able to put away savings as you mentioned.

Canada continues to have the worst level of family debt in the G7 and the lowest saving rate in the G7. At the same time, over 50% of Canadians struggle to put food on the table. According to the most recent figures, as you know, half of Canadians are within $200 of insolvency on any given month. That has been exacerbated by this pandemic.

What we see is a growing chasm between a smaller number of Canadians who are increasingly wealthy and a large mass of Canadians who are absolutely struggling to make ends meet, yet we have a government that has practised failed fiscal policy, hasn't put in place a wealth tax like other countries and hasn't put in place a pandemic profit tax, even though during the Second World War we had that in place and it allowed us to fight Nazism and fascism and, after the war, put in place all of the infrastructure contributing to health, education, transport and housing that allowed us to build a prosperous economy.

My question is twofold. First is on the implications on monetary policy of what is a failed fiscal policy where the wealthiest citizens are simply not paying anywhere remotely like their fair share of taxes. Then secondly, in terms of the consultations that the Bank of Canada has done, increasingly people have been raising in the course of those consultations the impacts of targeting full employment at the same time as there is inflation targeted. In other words, having a dual mandate for the Bank of Canada on monetary policy.

I recognize that monetary policy can't solve all of the problems of failed fiscal policy, but increasingly, as you note, with half a million people who haven't been able to return to their jobs and knowing from the past that it takes up to 10 years for the economy to recover for lower-income people, as we saw during the Spanish flu pandemic, what do you think the implications are for having a mandate that actually takes into consideration full employment?

[Tiff Macklem]

Peter, let me answer that in two parts.

First of all, I want to assure you that employment is an important element of our framework. You can't keep inflation sustainably at 2% if you have a large number of unemployed people, because the economy is missing income and that means there will be downward pressure on inflation.

At the same time, having inflation well anchored at 2%, the lesson from history is that it reduces these inflationary boom-bust cycles that we had, particularly in the 1970s, in which you get big buildups in inflation and then you have to have a big recession that puts a lot of people out of work.

It's these two things. Stable inflation stabilizes the labour market and you get less cyclical unemployment, and at the same time, full employment, a complete recovery, is critical to keeping inflation sustainably at 2%.

The labour market is an integral part, as you've no doubt seen, particularly given, as you highlighted, the very unequal impacts this pandemic is having on the labour market. We've been talking a lot about the labour market. We've been looking at a broad range of labour market indicators. Because there are some big divides, we are looking at labour markets at a more granular level.

You referenced what we heard from Canadians. It was very interesting what we heard with respect to our inflation target regime. Overall, our flexible inflation targeting regime was the preferred alternative of Canadians, but as you suggested, many Canadians did highlight that they want to make sure that employment and jobs are a central part of our framework.

Some Canadians suggested that a dual mandate might be a way to do that. I will say, though, there was quite a bit of diversity around that view. Some Canadians thought a dual mandate would be a good idea. Others were concerned that, unlike inflation, the Bank of Canada ultimately can control inflation but we don't have as direct control of labour markets, so it might not be a good idea to have a dual target.

The main message from Canadians was that this should be an important part of the considerations, and I think we all found that feedback very interesting.

[The Chair, Liberal, Wayne Easter]

Peter, you have time for just a fairly quick question.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Just to follow up, as you mentioned earlier, you are prepared to comment on implications on monetary policy of fiscal policy.

Many people are saying that the government's fiscal policy has failed because of this creation of a very profoundly unfair tax regime. Do you feel that it has implications for monetary policy, understanding that monetary policy can't solve a bad fiscal policy but that there are implications of a bad fiscal policy on monetary policy?

[Tiff Macklem]

What I would highlight, as I said before, is that fiscal policy, federal and provincial, has played an extremely important role in helping Canadians get through this pandemic. Indeed, I think fiscal policy has played a leading role.

Monetary policy has played an important role, but monetary policy does not have the ability to target certain groups. It's a broad macro tool.

Fiscal policy does have the ability to target certain groups. The supports they've given, particularly to the most vulnerable Canadians who have lost their jobs, have been very important to supporting Canadians and helping us through this recovery.

I'll leave it there.

[The Chair, Liberal, Wayne Easter]

Okay, and we'll leave it there, too. That was seven minutes for all four of you.

We're into five-minute rounds, with Mr. Fast, followed by Mr. Fraser.

Ed.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you, Mr. Macklem, for appearing at the committee. I believe it's the first time I've had a chance to speak with you here.

I want to return to the issue of quantitative easing. I'm not going to tell you how to do your job, but I do want to ask you this question.

You've signalled that you'll be winding down your QE program at some point in time. Did you suggest that might be the second half of 2022, or did I get you wrong?

[Tiff Macklem]

It is a bit complicated.

The second half of 2022 refers to, based on our forecast, when we expect slack is likely to be absorbed. What we have indicated with respect to our forward guidance for our policy interest rate is that we would hold the policy interest rate at its current level of a quarter of a per cent until slack is absorbed.

That forward guidance is really more about the policy rate, and I would underline that this is a commitment not to raise it. It doesn't mean we will automatically raise it when we get there. We'll have to see what the economy needs when we get there.

[Ed Fast, Conservative, Abbotsford, BC]

Yes, I understand.

[Tiff Macklem]

We are committing to hold it there.

With respect to our quantitative easing program—

[Ed Fast, Conservative, Abbotsford, BC]

Actually, I have a specific question on that, because my time is limited.

As you wind down, obviously the government will continue to have to borrow at, say, an average of $3 billion a week, as my colleague, Mr. Poilievre suggested.

Am I correct?

[Tiff Macklem]

Are you asking whether that's in the budget? Yes.

[Ed Fast, Conservative, Abbotsford, BC]

No, it's not whether it's in the budget. Given the size of the deficit as projected for this year, the government is going to have to borrow money to make up that deficit.