Evidence of meeting #112 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was spending.
A video is available from Parliament.
NDP
Daniel Blaikie NDP Elmwood—Transcona, MB
Is an assessment of that effect on inflation of unit profit costs something that the bank could undertake to study and report on?
Governor, Bank of Canada
We have studied.... As the senior deputy governor indicated, our colleague actually gave a full speech on this issue. As I said, what we can see is that it's more about the speed at which higher input costs get passed through—
NDP
Daniel Blaikie NDP Elmwood—Transcona, MB
Is it not true that if it were just passing on higher input costs, profit wouldn't go up? Doesn't profit only go up if you have price increases that exceed the additional input costs?
Governor, Bank of Canada
That is correct.
I think, though, that when we're looking at the profit share in the economy, we see a long secular trend over many years. We've seen a rising share. The return to capital over time has tended to go up, and the return to labour has tended to go down. That's a long secular issue. That's not something that's just happened in the last year.
Daniel Blaikie NDP Elmwood—Transcona, MB
It's not secular in respect of fiscal policy, though, which has offered a declining corporate tax rate in a climate of declining business investment. Maybe we're just talking at cross-purposes in terms of how we deploy the word “secular” here. It's not like that was just not happening, because there weren't ardent believers in certain fiscal policies that have created the context.
Governor, Bank of Canada
I'm not saying it's secular in the sense that it came from outer space. Secular is maybe a trend over many, many years.
Liberal
The Chair Liberal Peter Fonseca
Thank you, Mr. Macklem.
Thank you, MP Blaikie.
We'll now go to MP Chambers, please.
Conservative
Adam Chambers Conservative Simcoe North, ON
Thank you, Mr. Chair.
Senior deputy governor, I want to clarify something, because we had a bit of a back-and-forth before, in my last round. I think I heard you agree that it's possible that the market is demanding a higher interest rate in order to absorb the record amount of all government debt.
I'll note that most of the debt being rolled over this year by the federal government is debt it incurred during COVID, and it negligently borrowed at the short end of the curve.
Isn't it possible, or would you agree, that the market is actually demanding a higher interest rate because it has to absorb that amount of borrowing?
Senior Deputy Governor, Bank of Canada
Whenever there is more debt being issued, there is more competition, so prices will go up.
Conservative
Adam Chambers Conservative Simcoe North, ON
Thank you very much.
Governor, you mentioned in the press conference last week that the path to a soft landing is now narrower.
My sense of it is that the risk now is greater that we will have some kind of economic event or economic uncertainty that in normal times would demand a lowering of the interest rate. It now looks like that may happen in 2025. However, if we can't get inflation down before that happens and if we don't have some kind of reason to lower the rate before 2025, before inflation comes down, we're not actually going to be able to lower the policy rate in order to deal with that economic shock.
Is that accurate?
Governor, Bank of Canada
As long as inflation is well above the target, it will certainly be harder.
Conservative
Adam Chambers Conservative Simcoe North, ON
You're saying that if high inflation stays around until 2025, it will prevent the bank from acting to support the economy if we don't have inflation under control.
Governor, Bank of Canada
It will make it harder. It depends, obviously, on the size of the shock. If it's a big enough shock, the downward pressure on inflation caused as a result could cause us to reconsider our rates, but yes, I largely agree that when you're starting from a position when inflation is above target—and it's been there for two years—you have less scope to lower interest rates and stimulate growth.
Conservative
Adam Chambers Conservative Simcoe North, ON
It underscores the importance of governments at all levels taking all the necessary steps they have in their tool box in order to lower inflation to basically make that narrow path as wide as possible in order for the bank to be able to act if it needs to act.
Is that fair?
Conservative
Adam Chambers Conservative Simcoe North, ON
When the premiers were writing you letters, were you just screaming inside, wanting to write back two words, “Stop spending”?
Governor, Bank of Canada
With respect to the letters, I know you're all hearing from your constituents. I know the premiers are hearing from their constituents. This is putting more focus on inflation. It's putting more focus on interest rates, and that's a good thing.
As I've said already, it would be helpful if governments at all levels were considering the inflationary consequences of their spending decisions when they take those decisions.
Conservative
Adam Chambers Conservative Simcoe North, ON
I think we're going to find that StatsCan will report the new poverty line statistics early next year, I think in January or February. The number of households or individuals who will now fall below the poverty line because inflation is going to be quite high.... I suspect, as you said before, that inflation hurts the vulnerable the most, so it's important to know that if we don't get this right, it's the vulnerable people who will suffer most.
Is that correct?
Conservative
Adam Chambers Conservative Simcoe North, ON
I read with great interest that the bank has picked up Nick Leswick from the finance department. He's no stranger to this committee; I know he'll do a great job for you and I'm glad to see him go to the bank.
Thank you for coming today. Thank you for being transparent and available to answer questions. I think that improves the confidence that Canadians have in the institution.
Thank you, Mr. Chair.
Liberal
The Chair Liberal Peter Fonseca
Thank you, MP Chambers.
Our final questioner will be MP Baker for the last five minutes.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
Thanks very much, Mr. Chair.
Again, Governor and Senior Deputy Governor, thank you for being here today with us.
In my earlier questioning I asked you about the causes of prices going up, the causes of inflation. I want to recap some of what you said and then I have a few questions.
When you talked about the primary cause of inflation, I noted three things. You talked about some of the supply chain bottlenecks during the COVID crisis, which didn't allow supply to keep up with demand. You spoke about Russia's invasion of Ukraine and the resulting impact on energy prices and food prices globally, but you also talked about demand here in Canada domestically bouncing back more quickly than expected post-COVID.
Is that a good summary of the three most important factors that have driven prices to go up over the last several years?
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
Thank you.
You said during your testimony here today that inflation is a global phenomenon, and we've just talked about some of those global factors, but it has also infected countries around the world, including our G7 counterparts like the U.S. and the European countries.
Is that correct?