Finance Committee on Nov. 26th, 2020

[Ted Falk, Conservative, Provencher, MB]

While you're looking for that, you did mention that you've been switching more to long-term purchases. What is the rationale for that?

[Tiff Macklem]

In the initial March and April part of the crisis, the focus was very much on restoring market function. The whole financial system was clogged. Credit markets were very strained. We came in and bought heavily at the very short end of the curve, which was key to restoring market functioning.

As market functioning has been restored, we've discontinued a number of our programs. We've continued our government bond purchase program, though, as a way to provide quantitative easing. With that, we've shifted to buying further up the curve. Households and businesses typically borrow for three, five, 10, or 15 years. That's the part of the yield curve where they're borrowing the most. Our QE program is really targeted at lowering their cost of borrowing, so we're concentrating our purchasing power at that part of the curve. In that way, it sort of maximizes the per dollar impact of our purchases.

[The Chair, Liberal, Wayne Easter]

We will have to end that round there. Sorry, Mr. Falk.

Just to be clear, for the federal reserve at 60%, I assume you meant the U.S. Federal Reserve?

[Tiff Macklem]

That's correct.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Fraser.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you very much, Mr. Chair. Thank you to our witnesses for being here.

I'm going to start on a line of questioning about the intersection between fiscal and monetary policy as part of the pandemic response.

Mr. Macklem, you've led off your remarks describing the fact that there's a public health threat that has posed a serious risk to our economy. It's not as though there's some fundamental, underpinning problem with the economy, but instead, an exogenous shock to the economy.

You've made a number of decisions, as the Bank, to reduce our interest rate to the effective lower bound, as well as the quantitative easing that you described in your opening testimony. This says to me that you may have used the tools in your tool bag, and if I'm looking to find the tools to continue to solve the pandemic response, either from a public health or economic perspective, the remaining tool is really fiscal policy.

Can you describe to me where you think the federal government should aim its sights to most effectively deal with the pandemic? Specifically, should we be targeting public health measures that will help eliminate this virus quickly and, second, getting cash to those households and businesses that are in need by extending life support to them effectively, so they're still here when this pandemic is over to help the economy come back once the virus is behind us?

[Tiff Macklem]

I'm really going to leave those decisions to parliamentarians. As I highlighted in my opening remarks, clearly the evolution of the pandemic has very important implications for the economy. Lives and livelihoods are very closely related. People need to feel safe. They need to feel like they can conduct their business and remain healthy and their families can remain healthy. That's core to their confidence. That's going to be core to their ability to participate in the economy. I don't see that there's really a big trade-off here. The two need to go together.

With respect to the specific fiscal measures, I'm going to leave those to parliamentarians. I will say, though, that we are providing a considerable amount of monetary policy stimulus. We've indicated that will need to continue for some time. Certainly, the amount of monetary space we have is limited, but I wouldn't want to give the impression that there are not other things we can do. We do have the capacity to do more if needed.

As I was just highlighting, we own about 30% of the government debt. There's ample potential to scale up our quantitative easing if that were needed. There are other types of programs. Other central banks have used things like yield curve control. We could potentially lower the effective lower bound, even without going negative to 25 basis points. It could be a little bit lower.

Negative interest rates are in our toolkit, although that is not something we're actively discussing and we don't think it would be terribly helpful at this time.

I don't want to give the impression there's nothing else we can do. If needed, there are things we could do.

[Sean Fraser, Liberal, Central Nova, NS]

I appreciate that.

You mentioned during your responses to previous questions that the bank doesn't finance the government, but reduces the cost of financing the government. To date, with the fiscal measures that have been put in place, certainly, the debt is much larger than it was pre-pandemic.

Can you identify for us what impact that has had on the cost of servicing the debt for Canadians and for the federal government?

[Tiff Macklem]

Are you asking me what would the debt service cost be if we hadn't lowered interest rates?

[Sean Fraser, Liberal, Central Nova, NS]

No, I'm asking, effectively, because of the measures that you've taken to reduce the cost of borrowing for the federal government, has the cost of servicing the federal government's debt changed? Has it become more expensive to service the debt? Has it become cheaper to service the debt?

[Tiff Macklem]

It's become less expensive to service the debt, certainly per unit of debt.

[Sean Fraser, Liberal, Central Nova, NS]

On the whole, has the actual cost of servicing a much larger debt now, on the back end of these measures, actually decreased?

[Tiff Macklem]

Yes, debt service costs now are quite low.

[Sean Fraser, Liberal, Central Nova, NS]

You mentioned specifically near the end of your remarks that you expect that interest rates will remain low for a very long time.

The last time you were before this committee, you explained part of the reason behind that was that the bigger risk facing the economy was deflation, not inflation. Do you still hold that view today, and if not, why do you believe the rate of interest will remain low for a long time?

[Tiff Macklem]

Yes, we continue to believe what I said the last time. In fact, we've been a little more precise about it. In our October monetary policy report, we indicated that in our current projection—and I'd underline that there's a lot of uncertainty around these projections and they depend heavily on the evolution of the virus—we expect slack to be absorbed sometime in 2023. We're indicating that we'd hold the interest rate at the effective lower bound until slack is absorbed, so that takes us into sometime in 2023.

That also provides the conditions for when we would exit. It gives you an outlook, based on our current projection.

[The Chair, Liberal, Wayne Easter]

Mr. Fraser, I'm sorry, but we're out of time with you as well.

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

Mr. Ste-Marie.

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

Thank you, Mr. Chair.

First, I would like to thank Governor Macklem for his interesting presentation.

I would also like to thank Senior Deputy Governor Carolyn Wilkins.

I would like to go back to your comments to Mr. Wayne Easter, the chair of our committee, and to tell you once again how grateful we are for each of your appearances here with the committee.

Your comments were clear and informative. When you answered our questions, we always learned something. I also commend you and Mr. Macklem on your command of the French language.

I'll begin by talking about inflation.

Mr. Macklem or Ms. Wilkins, has maintaining control over inflation, a key criterion of the Bank of Canada for several decades, been a factor during the crisis so far?

[Tiff Macklem]

I'll ask Ms. Wilkins to answer that, because she directed the research into our inflation target.

[Carolyn A. Wilkins]

I'd like to begin by thanking you for your comments. I appreciate them and it's very good of you.

The short answer is yes, very much so. Inflation appears to be remote from the current problems people are facing, such as losing their jobs and uncertainty. At the same time, a low and stable inflation rate is very important for business and personal planning.

Our methods for stabilizing inflation also include stabilizing the economy and placing it on a strong foundation. This makes it possible for jobs to come back, for the economy to recover and for businesses to become more profitable. Even though our target is inflation, some of the factors we take into account, like production capacity and employment, affect people directly.

There are of course other ways of handling monetary policy. I suggest that you go to our Website and consult all of our communications pertaining to possible frameworks for monetary policy other than those we are discussing at the moment.

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

Thank you.

One of my concerns is that inflation has remained below the target during the current crisis, as the Governor reminded us in his introduction. In his final answer to my colleague, Mr. Fraser, he even mentioned that we were more likely in a period of deflation than inflation at the moment.

Although I understand that it may be only temporary, I'm worried about some disparities in a number of economic sectors, particularly for certain assets. While inflation has remained below the targets, I'm affraid that bubbles might form in some sectors, like the stock market or real estate. Examples of this might include principal and secondary residences in the residential sector.

Do you look at and analyze these aspects of the economy? If so, what is your reading on the possible risk of bubbles in these sectors?

[Carolyn A. Wilkins]

We look at financial markets very closely, and the price of assets in these markets. We also look at the real estate market. My colleague Toni Gravelle gave a speech this week specifically on the topic of households and businesses.

We all noticed a strong rebound in the real estate market this summer. We believe this was largely because of suppressed demand, by which I mean that there were people who wanted to buy a house, but could not. So when things began to open up again, everyone jumped on the bandwagon.

What we are seeing at the moment in these markets is not exactly what happened in Vancouver and elsewhere in 2016. There is not much speculation yet, but we need to continue to monitor it. It's too early in the recovery phase to really know. We're going to keep a close eye on it.

As for assets like the stock market or the fixed income market, it is unwise for a banker working at the Bank of Canada to comment. I can say that when we look at what's happening, it's normal for prices to increase when the interest rate goes down. It's part of the monetary policy transmission mechanism.

I am not commenting here on prices or on the fact that they appear normal and fair. It's up to the financial market to decide.

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

Thank you.

The chair has indicated that I have time for a short question.

Many are out of pocket as a result of the economic crisis caused by the pandemic, like local companies and businesses, and the people who lost their jobs.There are others though—individuals, households and businesses—that have maintained the same level of income and very high savings. I can't remember ever seeing such high savings, particularly given that we're in a crisis.

Do you have any concerns about high savings in the economy?

What impacts might there be?

[Tiff Macklem]

I can take this one.

You're right that there's strong growth in savings. In our forecasts, we assumed that most of these higher savings would be permanent. Households will use them to pay down debt or to invest. We believe that they will spend some, but not most, of these savings.

It's also possible, particularly once there is a vaccine, that households will spend more than we have forecast. If so, the economy will bounce back more quickly. We shall see.

We use our judgment when making forecasts. There are a few upside risks, but also some downside risks.

[The Chair, Liberal, Wayne Easter]

We'll go to Mr. Julian, for six minutes, and then to the next round with Mr. Poilievre, for five minutes.

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

Thank you, Mr. Chair, and thank you, Governor Macklem and Deputy Governor Wilkins, for being here today. We always appreciate your visits to the finance committee.

Deputy Governor Wilkins, we wish you all the best in your future. We certainly hope, during this pandemic, that your families and your loved ones are safe and healthy.

This has been a traumatic and tragic period in Canadian history, what many people have attributed as the biggest convulsion, brought on by this pandemic, since the Second World War.

As you will recall, through the Second World War and in the aftermath, there was a change in function and mandate for the Bank of Canada. This week, many people, including dozens of economists in Le Devoir, have pointed to other central banks, for example, in New Zealand, where the mandate has been enlarged

For a generation, we've been focused on inflation control. People are saying, and many economists are in agreement, that the mandate should include, for example, pushing back against the massive inequality we've seen through this pandemic, dealing with and supporting the transition we have to make to deal with the climate emergency, and even looking at full employment.

I'd like your reaction, Governor Macklem, to these voices saying that the mandate needs to be broadened, so that we can tackle the challenges we have going through the pandemic, and the aftermath.