Evidence of meeting #7 for Finance in the 43rd Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was inflation.
A video is available from Parliament.
Governor, Bank of Canada
You packed a lot into that question, so let's take it in two parts. I'm going to ask Ms. Wilkins to lead off. She's been leading our review of our inflation-targeting framework. I'll pick up on some of the points after we've heard from Ms. Wilkins.
Senior Deputy Governor, Bank of Canada
I'll be very brief in order to give you time, Governor. That was a big question, and an important one.
You're right. There has been a lot of focus on whether central banks can do better than their flexible inflation targeting. Our own research shows that in some dimensions, some other frameworks can do better. As an example, a dual mandate whereby you take into account both inflation and full employment might do better in stabilizing the economy in income space—stabilizing jobs.
At the same time, it does a little worse in stabilizing inflation. That's pretty intuitive. It comes at a cost of not being as simple and as straightforward in what we're actually trying to achieve. It makes it a little more difficult to be accountable for it, in part because you have two targets with one tool, but also because you have a target that is not really observable: no one knows what full employment is.
When it comes to the other objectives—climate change, income inequality—income inequality is certainly something we can take into account when we pick a framework, but monetary policy is a blunt instrument and can't pick and choose where growth happens.
I'll turn it over now to Governor Macklem.
Governor, Bank of Canada
The points you raise are extremely important.
As Ms. Wilkins highlighted, we are doing a thorough review of our framework. I think what it's showing is that under some circumstances, some modifications can do better, but there's nothing that does systematically better.
We're not finished that review. and it would be premature to provide any conclusions. We are certainly looking at these issues.
What I will say, though—and I want to stress it—is that we take these things into account. The Bank of Canada Act tells us to promote the economic and financial well-being of Canadians. The inflation target, really, is the way we do that.
In order to keep inflation sustainably at 2%, we need to be very conscious of what's going on in labour markets. If there's a lot of unemployment, inflation is going to fall.
We are seeing that this crisis is widening divides in society, and inequality is something we have been talking about. It is a concern. If this recovery leaves some people behind, the productive capacity of our economy will be reduced. The sustainability of our own recovery will be reduced.
These things are factored in, but I think what we've learned over time is that we have to keep control of inflation while we do what we can for these other factors. If we lose sight of anchoring inflation expectations, then nothing works better: there are worse inflation outcomes, there are worse employment outcomes.
Climate change—I spoke about this last week—is going to be a major force in the economy over the next few decades. It's really important that the Bank of Canada understand the implications of climate change for the economy and for inflation.
We also have a role to promote the efficiency and stability of the financial system. We're already doing a fair amount of work on the stability of the financial system. If we have a very disruptive adjustment to climate change, we're going to see a big re-pricing of assets, a big revaluation of companies. That could spill into our financial system. It could certainly impair the ability of the financial system to support the real economy. It could even lead to instability in the financial system.
We began last year, in our financial system review, analyzing and discussing climate risks, largely those to the financial system. Last week we announced a pilot project with the Office of the Superintendent of Financial Institutions and six financial institutions to develop scenario analysis.
That's a tool, effectively. There's a lot of uncertainty about climate change and what the implications are, but the idea is that uncertainty shouldn't be an excuse for inaction. We're going to work with OSFI and these six financial institutions to develop some scenarios that financial institutions could use to assess their own risks. We'll use it to help them with risk management and work with them to develop a methodology and an approach to doing so. The idea is to make this easier for everyone.
Liberal
The Chair Liberal Wayne Easter
We will have to end that round there. That's the first time ever I've seen Mr. Julian only ask one question in six minutes. It was a heavy question for sure, Peter, but you'll be on a little later in another round.
We have Mr. Poilievre for five minutes, followed by Ms. Koutrakis.
Mr. Poilievre.
Conservative
Pierre Poilievre Conservative Carleton, ON
What share of the new debt the federal government has added since March is locked in at current rates for 10 years or more?
November 26th, 2020 / 4:15 p.m.
Governor, Bank of Canada
You'll have to ask the Minister of Finance, who does the debt management. You're going to get an update on, I guess, next Monday, so—
Conservative
Governor, Bank of Canada
No. That's a question for the Minister of Finance.
I can tell you what's on our balance—
Conservative
Pierre Poilievre Conservative Carleton, ON
I'm not asking about your balance sheet. I will get to that in a moment.
Who sells the federal government's debt into the market?
Governor, Bank of Canada
We are the agent of the government. We run the government office—
Conservative
Pierre Poilievre Conservative Carleton, ON
You are responsible for it, then. You would know what share of the new debt is locked in for 10 years or more.
Liberal
The Chair Liberal Wayne Easter
Pierre, we will have to give the Governor time to answer. This is a very important issue, and I don't want to take this time from you. I don't want to be down to a four-second question and a four-second answer with the Governor of the Bank of Canada, so we are going to have to give at least minimal time.
Go ahead, Pierre.
Conservative
Pierre Poilievre Conservative Carleton, ON
I'm done. I asked my question. I'm still waiting for an answer.
Governor, Bank of Canada
I don't have the full-term structure of the government's debt in front of me. These numbers change regularly. As you well know, the debt is evolving, the term structure is evolving. The government is in the process of terming out the debt—
Conservative
Pierre Poilievre Conservative Carleton, ON
Okay, you don't know. That's all right. Your bank is the one that's issuing the debt, but you don't know how much of it is long versus short term.
We keep being told there is no risk to all this debt because it's all going to be locked in for the long run, but the data on your website shows that 91% of it is for terms of less than 10 years and susceptible to interest rate hikes. Back in 1978 through to 1980, interest rates rose. They tripled. They went from 8% to 22%. No central banker planned that or anticipated it and yet it happened, and the Canadian economy suffered as a result.
Forget a triple increase. What would be the cost to the federal government of a one percentage point increase in the effective rate of interest on its debt?
Governor, Bank of Canada
The current debt is about a trillion dollars, so you can multiply 0.01 by a trillion. That gives you the steady-state increase. In practice, of course, that debt is of varying maturity, so in the first year it will be the amount that rolls over in the first year. In the second year it will.... When the whole thing rolls over it will be 0.01 times a trillion. That could take several years.
Conservative
Pierre Poilievre Conservative Carleton, ON
What would be the effect of the cost to the Canadian economy of a 1% effective increase in the interest rate?
Governor, Bank of Canada
The situation in which we'd increase interest rates is if the economy is in a better situation than it is now, so we're not—
Conservative
Governor, Bank of Canada
As we've indicated from our forward guidance, we're not contemplating raising interest rates at the moment.
Conservative
Pierre Poilievre Conservative Carleton, ON
As I pointed out earlier, the governors don't always contemplate interest rate hikes and they happen anyway because of changes to market conditions and unforseen situations.
Let's move on now to the QE program, which is the massive purchase of government securities by the central bank.
You said a moment ago that your bank actually sells these securities to the marketplace and then buys them right back from the same investors to whom you sold them. What is to stop an investor from profiting off the difference between the price of a government bond or treasury that you sell them and the price you pay to buy them right back?
Governor, Bank of Canada
Both of these are done in competitive auctions. The auctions are heavily oversubscribed. There are lots of bidders on both sides, so it's a competitive process. I think that should give you some assurance that—
Conservative
Pierre Poilievre Conservative Carleton, ON
I have no doubt it's competitive.
You've stated the purpose of quantitative easing is to drive up bond prices, so presumably you're paying more for the bond after you've increased its price through your actions than you sold it for. The difference is profit to the investor who bought them from you and sold them back. Ultimately, that cost has to fall on somebody's shoulders. Who actually pays that price?