Finance Committee on April 27th, 2021

[Tiff Macklem]

That's correct.

[Ed Fast, Conservative, Abbotsford, BC]

As you wind down your QE program, I'm assuming that the government is going to have to go to the market.

[Tiff Macklem]

The government is going to the market. The government auctions this debt into the market. What we're buying through quantitative easing we buy in the secondary market.

[Ed Fast, Conservative, Abbotsford, BC]

Okay. You're buying it, then, at market interest rates. Is that correct?

[Tiff Macklem]

That's correct. It is bought in a competitive reverse auction process.

[Ed Fast, Conservative, Abbotsford, BC]

All right.

Let me also ask you about the stimulus program. You have $100 billion-plus of so-called stimulus that is being injected, but you also have influences from the United States. You have a very large infrastructure program and a large stimulus program. You yourself have referred to there being record household savings sitting on the sidelines right now.

What impact, if any, will these different elements have on the inflationary pressures that the bank is going to have to deal with?

[Tiff Macklem]

With respect to the U.S. recovery, it is one reason that our outlook is stronger. With the U.S. combination of the rapid rollout of vaccines and a large fiscal stimulus package, the U.S. economy is growing strongly. That will certainly help our exports, and this is reflected in our outlook.

That's an important element of our projection. The main reason for the recovery in our projection is that we are expecting a strong consumption-led recovery. As we can get back to more normal activities, we think Canadian consumers are going to spend money and that will lead the recovery. The U.S. element is helpful, because it will broaden the recovery of consumption. We'll get more exports. That should lead to more investment.

This all means you get a more broad-based recovery, and a more broad-based recovery is more sustainable. This is something we'll certainly be evaluating, going forward, in assessing how much monetary policy stimulus we would need.

[Ed Fast, Conservative, Abbotsford, BC]

Actually, my question was directly on inflationary pressures. Do you expect that this massive stimulus from different directions is going to stoke some inflationary fires?

[Tiff Macklem]

You can see our projection for inflation in the outlook we published. We revised upward our outlook for the U.S. economy, substantially, and we've built in at a macro level the fiscal stimulus that's in the budget.

What you see is that inflation is rising right now, temporarily, to about 3%. That really reflects some special factors. I can get into them, but it's more to do with what happened a year ago, when a number of prices plummeted. A year later that creates a temporary blip of inflation.

As I highlighted, however, we still have high unemployment in this country. There are still many people out of work. This is putting downward pressure on inflation. We expect this slack to be absorbed, which is a good thing, and as that slack is absorbed we should get inflation sustainably back to 2%.

What you can see is that inflation goes up to 3%, it comes back slightly below 2% and then it goes slightly above 2% and settles into 2%. In our projection it's staying pretty close to 2%, and we've factored those things in.

[Ed Fast, Conservative, Abbotsford, BC]

Mr. Chair, how much time do I have?

[The Chair, Liberal, Wayne Easter]

You have zero time left, Ed. I'm sorry.

[Ed Fast, Conservative, Abbotsford, BC]

Okay.

[The Chair, Liberal, Wayne Easter]

We will go to Mr. Fraser. Then we'll go to one question from Mr. Ste-Marie and one from Mr. Julian.

Mr. Fraser, you have five minutes.

[Sean Fraser, Liberal, Central Nova, NS]

Governor Macklem, thank you so much for being here.

I'll jump right to my questions in the interest of time.

During your testimony you indicated that the mix of fiscal and monetary supports that had been provided to the economy have largely been effective. You described the downward pressure on the economy that could lead to deflation and potentially job losses had those supports not been there.

I'm curious to know whether you've done any analysis or have any views on what effect the premature withdrawal of significant fiscal and monetary supports would have by way of impact upon real people and businesses across the Canadian economy.

[Tiff Macklem]

What we've seen in past recoveries, and coming out of 2008-09 would be the most current example, is that if you withdraw stimulus prematurely the recovery stalls and then you have to put in some new stimulus to get it back. You lose the momentum and you have to restart it. That is certainly a lesson we've all taken to heart.

There are other lessons from history. If you go back to the late sixties and the early seventies, when there wasn't enough attention paid to inflation, the result of that was that we built up a big head of steam on inflation, and then it was very difficult, very costly, to drive that out of the system. I think the lesson from history is that you do want to support the recovery through its full length, and that will require some patience. However, you also need to react to the data as you see it coming in and adjust accordingly so you don't overheat the economy.

[Sean Fraser, Liberal, Central Nova, NS]

I have two quick questions to follow up on that.

Picking up where you left off, you mentioned the indicators that you need to pay attention to. What kind of economic conditions would you need to be observing before you would have fears that inflation is going to be a serious problem for the Canadian economy?

[Tiff Macklem]

Let me say a word about our forward guidance that we've put out, and how it works.

Let's just remember where we were a year ago. A year ago, the economy was basically going over a cliff. Inflation was extremely low; it was actually negative. Our biggest fear was deflation, which would have been very damaging. Against that background we used a number of extraordinary tools. One of them is exceptional forward guidance.

We've indicated that we will hold the policy rate at a quarter of a per cent until slack is absorbed. We take that commitment seriously, and it was done very deliberately to prevent a much worse crisis. As I said, we still have some way to go, but it is working.

What that means going forward is that, given that we're going to hold it at the effective lower bound until slack is absorbed, we probably will get some excess demand, because as we move from excess supply, we'll probably get a little excess demand. You can that in the forecast we've put out. With that you'll probably get inflation going a little over the 2% target.

We have a control band of 1% to 3% and we're prepared to use it. That's part of a flexible, inflation-targeting regime. As we get there it will be very important to assess pressures in labour markets and pressures on physical capacity of companies, and it will be very important to look at the information in inflation itself. If it's coming in above what we think it should be, that's an indication that maybe things are tighter than we thought.

On the other hand, if it's coming in a little less than we thought it would be, that's a suggestion that maybe there's a bit more room for the economy to grow without inflationary pressures, and those are the kinds of assessments we'll be making. I look forward to that day when we get to do those assessments, but that is still some ways off. We have to get there first.

[Sean Fraser, Liberal, Central Nova, NS]

I very much look forward to those times as well.

I have a final question with only about one minute left. It segues perfectly from your description of the 1% to 3% band that you're aiming for.

One of my committee colleagues Mr. Poilievre tweeted several minutes ago, “Now, Central Bank governor admits to Finance Committee that inflation will be well above 2% target for the next two months—after saying for months that would not happen.”

That is not my view of your testimony today whatsoever. Would you care to offer any clarifying remarks so your testimony is not misrepresented?

[Tiff Macklem]

If you look back, you'll see that we've actually been saying for some time that inflation would go above the 2% target for a period on roughly the first anniversary of the pandemic. Just to elaborate, I think you'll remember that a year ago the economy went over a cliff. Oil prices actually went negative. Gasoline prices were incredibly low, and prices of things that were deeply affected by the pandemic—airfares, for example, since airlines were seriously constrained—plummeted.

We measure inflation as the 12-month rate of change of the CPI. We have the March number of 2.2, which is relative to March of last year. When prices were highly depressed a year ago we had a temporary rise in inflation. That's a temporary effect due to these technical base-year effects. The underlying pressure on inflation from the economy is still downward because there is still considerable end-use capacity still. Those technical effects will fade, and inflation will come down because of these downward pressures. That's why we need to continue to provide support.

[The Chair, Liberal, Wayne Easter]

Thank you, Governor.

[Sean Fraser, Liberal, Central Nova, NS]

That's my time.

Thank you, Governor, and thank you for your service throughout this pandemic.

[The Chair, Liberal, Wayne Easter]

We will go with one question each from Mr. Ste-Marie, Mr. Julian, Mr. Kelly and Mr. Fragiskatos, and then we'll have to end.

I would say, Governor, that I'm sure glad we're learning from the lessons of history. I'm one—and there may be others on this committee—who faced a 23% interest rate in the 1980s, and I'll tell you we paid for that for a very long time. Lessons from history are a good thing.

Mr. Ste-Marie, you can have one question.

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

Thank you.

If I have understood correctly, Mr. Macklem, you reminded us that monetary policy focuses on the economy as a whole and that, if we want to have more targeted interventions, tax and fiscal policy should rather be used.

If we are worried about the mismatch between the real economy—consider the job market, for example—and the rise of certain assets—think of the residential real estate industry—we should rather turn to fiscal and tax policy to resolve that mismatch.

Could you comment on this issue?

[Tiff Macklem]

As you implied, monetary policy is a macroeconomic tool, and it should be managed in a way so as to support the economy as a whole. The demand is now very strong in the real estate market. For the most part, we are all working from home. Our children are studying at home. Our leisure activities are taking place at home.

Canadians want more space because they are home all the time. In addition, they no longer need to go to work. Many of them are thinking that, in the future, even after the pandemic, working conditions will be more flexible. They are prepared to move further away from downtown, to the suburbs of major cities. So we are seeing a surge in demand, and the supply is slow to catch up, so home prices are rising.

We predict that the supply will meet the demand and that the market will become more balanced, but it will take time. There are risks involved, especially if home owners think that the price increases we have been seeing will continue. They risk taking on mortgages that are too high for their means.

However, measures have been taken. For example, the Office of the Superintendent of Financial Institutions, or OSFI, recently announced changes to its 2020 guide, and that's a good idea. It creates some dynamism. There is talk of a minimum mortgage rate. However, when interest rates are very low, as they are now, the likelihood of them increasing in the future is higher. Canadians should be protected against that risk.

The federal budget also contains a few initiatives that can increase the housing inventory, and that will also be useful.

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

Thank you very much.