Finance Committee on Nov. 26th, 2020

[Tiff Macklem]

As I said, it's a competitive process. Exactly as you indicated, the way quantitative easing works is that by buying the bonds, that creates more demand, which pushes up the price and lowers the yield. That is how we're delivering monetary policy, lowering the cost of borrowing for Canadians. That's what it's doing.

[Pierre Poilievre, Conservative, Carleton, ON]

Yes, but you're pumping $400 billion into financial markets, inflating financial assets and enriching the people who own those assets and who are overwhelmingly affluent and well-to-do people. In the process, you are diluting the wages of working class people.

Your own policy paper from your bank shows that inflationary costs are borne disproportionately by the poor and the disadvantaged. You're effectively transferring an enormous sum of wealth to those who have financial assets, while diluting the wages of working-class people. Are you not worried that this is going to expand the gap between rich and poor?

[Tiff Macklem]

There are a couple of parts to that question, so let me unpack it.

First of all, I agree with you entirely that inflation is borne disproportionately by the less wealthy people. They tend to operate more in cash, so they tend to disproportionately bear the cost of inflation. That's exactly why—that's an important reason why—the mandate of the Bank of Canada is to maintain low, stable and predictable inflation. That's something we can do for society.

Right now, inflation is actually too low. It's below our 2% target. It was 0.7% in October. As you're well aware, over 600,000 Canadians are unemployed. There's a lot of downward pressure on inflation. We're more worried about it going even lower, which can be harmful for other reasons.

[Pierre Poilievre, Conservative, Carleton, ON]

Right. Thank you.

I would just point out that—

[The Chair, Liberal, Wayne Easter]

We are considerably over time, Pierre.

[Pierre Poilievre, Conservative, Carleton, ON]

Can I ask a 10-second question?

[The Chair, Liberal, Wayne Easter]

No. We're already a minute over.

I'm not sure if Mr. Macklem had finished his answer. I was going to give him time to finish that very deep question.

Are you complete, Mr. Macklem?

[Tiff Macklem]

Yes, I think I've completed it.

[The Chair, Liberal, Wayne Easter]

All right.

We'll likely have a little time later, Mr. Poilievre, because we have an hour and a half with these witnesses.

Ms. Koutrakis.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you.

[Annie Koutrakis, Liberal, Vimy, QC]

Thank you, Governor and senior deputy governor, for appearing before our committee this afternoon, and thank you for the service for all Canadians across this beautiful land.

I believe that the government's response has measured up to the unprecedented health and financial crises. We are starting to see the rebound leading to a better outcome in economic and employment growth, as virtually all public and private sector economists expected in the spring. I also believe that the federal government response was fully in line with the Bank of Canada's.

Having said that, I would like to ask a few questions on the Bank of Canada's balance sheet. Can you outline how the Bank of Canada plans on managing expanded balance sheets? What would you say to Canadians who are concerned with the rapid expansion of the bank's balance sheet? Is there a timeline for reducing the balance sheet to normal levels of assets and liabilities?

[Tiff Macklem]

I'll underline a couple of things. First of all, using balance sheet is part of our extended tool kit. It is an unusual thing. It's not something we've done before, but we haven't had a pandemic before. We have never before had the type of collapse in economic activity we've seen in recent months.

There is more uncertainty about it, and I could certainly understand that Canadians would have questions about it, but as I tried to outline in my opening remarks, it's really an alternative way for us to lower interest rates. Normally, we lower interest rates by simply lowering the policy rate, but now that the policy rate is at its effective lower bound, we can't do that anymore. Therefore, to lower rates further out the yield curve where households and businesses borrow, we buy government bonds and that pulls it down. Yes, it's a different tool, but it works effectively in the same way as our traditional tool.

In terms of our balance sheet, we've been very careful in our policies to define the conditions under which we would exit. With respect to quantitative easing, we've indicated that we will continue the program until the recovery is well under way. Once we decide that the recovery is sufficiently self-sustaining, it's well under way and it doesn't need quantitative easing anymore, other central banks have exited from this and there are a number of steps you could take.

That's still some time off, so we haven't made any decisions yet. However, to give you a picture of what that looks like, the first thing is that you'd buy less; then you'd stop buying, but keep reinvesting the bonds that roll off, to keep your balance sheet stable. The next thing you could do would be to stop reinvesting, so as things roll off, your balance sheet would go down gradually, and if you needed to, you could even sell assets and tighten monetary policy more quickly. Certainly if you became concerned that inflation was breaking out, that is something you could do.

With respect to interest rates, we've indicated that we would hold the policy rate at the effective lower bound until slack is absorbed. Again, that defines the conditions for exit. Once slack is absorbed, I think you could expect that we would begin to raise interest rates. Again, that's some time into the future. In our own projection, it's in 2023.

[Annie Koutrakis, Liberal, Vimy, QC]

Thank you.

That's a great segue into my next question, because your most recent monetary policy report notes that a significant amount of slack and excess capacity in the economy will likely hold inflation down until 2022 or 2023. In addition to this, the PBO fiscal sustainability report published on November 6 says that the federal government's current fiscal policy is sustainable, with room to permanently increase spending. While federal levels of spending and debt are widely considered sustainable, there are concerns that the spending of some provinces is unsustainable.

What can the Bank of Canada do to address the fiscal sustainability of provinces, and is there a role that the federal government can play in managing provincial debt?

[The Chair, Liberal, Wayne Easter]

Mr. Macklem, we'll try to get you to hold that to a minute, if you can.

[Tiff Macklem]

Okay. I think I can be pretty brief.

On the first part of the question, it's up to the provinces to manage their fiscal affairs responsibly. By lowering the yield curve for Government of Canada debt, that helps provincial governments too. They fund at a premium over the Government of Canada curve, so when you lower the Government of Canada curve, it tends to lower the provincial curve as well. Indirectly, we are reducing their cost of financing as well, but that would really be the extent of it.

[The Chair, Liberal, Wayne Easter]

Thank you both.

We'll go to a short round by Mr. Ste-Marie, followed by Mr. Julian, for two and a half minutes each, and then we'll go on to Mr. Kelly for five minutes.

Mr. Ste-Marie.

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

Thank you, Mr. Chair.

At the beginning of the crisis in the spring, many stakeholders had concerns about the stability of Canada's financial system and the solvency of some provincial governments.

Now, eight or nine months later, how would you rate these two levels of stakeholders?

[Tiff Macklem]

I would ask Ms. Wilkins to answer you in a moment, because she was here in March and April.

To summarize, during that period, the Bank of Canada launched a program to purchase provincial bonds. The program was a way of providing support to help relaunch the market. It worked, and we have now discontinued our Provincial Bond Purchase Program.

The other program will remain in place until April. However, demand is very low because the market for provincial bonds is working very well at the moment.

Ms. Wilkins, could you add something? You were there when these programs were established.

[Carolyn A. Wilkins]

Yes.

It's true that there has for a long time been talk about high debt levels among certain stakeholders, both businesses and households, not only in Canada, but internationally as well. I can't speak about the solvency of the provinces individually. That question would have to go to someone else.

One way of understanding the financial markets' standpoint on risk is to look at risk premiums when provinces issue bonds. When we launched our program, it was very low, but the goal was to find a way of improving market performance. It was not intended to finance the provinces, but it worked for them. For Ontario and Quebec, the risk premium went to 120 basis points, which is nevertheless quite high. Today, it stands at half that figure. Risk premiums have dropped in all provinces.

Because the market is working better, we are no longer required to perform the same role that we did in the spring.

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

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Julian, go ahead.

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

I have three quick questions. Thank you for your fulsome answer to my last question.

Governor Macklem, you're in the process of doing a review for the renewal of the Bank of Canada's mandate next fall. Do you have a timeline for that, and is it something you would be able to share with the finance committee once that's completed?

[Tiff Macklem]

The current agreement goes to the end of 2021, so we would need to renew it before the end of next year. Yes, we would be very pleased to come to talk to the finance committee.

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

Secondly, OSFI told us in testimony earlier this year that about $750 billion has been offered in liquidity supports to the banking sector. The Bank of Canada's share would have been about $300 billion.

Can you confirm what actual amount of liquidity support was offered to Canada's big banks?

[Tiff Macklem]

There are several programs, but the largest program is called the term repo program. It's basically a program where we lend them money. That money is critical to allow them to fund mortgages, personal loans and business loans.