Finance Committee on Oct. 30th, 2023

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Would you say that since interest rates have gone up, housing starts are lower and we're seeing less new housing stock being added in a higher interest rate environment?

[Tiff Macklem]

Higher interest rates have dampened demand for housing. In fact, the housing market was very overheated. Housing prices were rising extremely rapidly when we had very low interest rates. As we've raised them, housing prices have actually come down. However, higher interest rates means the carrying cost of a mortgage is higher, so affordability has not improved.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

We've heard around this table from experts in the financial industry and the housing industry that the housing crisis won't be solved without some significant level of government investment and contribution. Are you inclined to agree with that assessment?

[Tiff Macklem]

I will say that we've had a building supply issue in housing for a decade now. Speaking on behalf of certainly the senior deputy governor and myself, we are pleased to see that governments on all levels are more focused on this issue. I don't think this is something that any one level of government is going to be able to solve by itself. It's going to take all levels of government putting their heads together. Ultimately, it's the private sector that will build most of these houses or apartment buildings. They certainly need to be at the table as well.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

I guess my question for you is this. When you talk about the forecast of a 2.5% spending increase across government, from the point of view of understanding inflation, from the point of view of understanding how we can get our housing market to the place where prices are coming down for Canadians and they're having access to more affordable housing, does it not make sense to discriminate between spending in general and spending on building new units? Whether those are affordable units or social housing units or whether it's financing that facilitates market housing, is that not a categorically different kind of spend than general increases in spending with respect to the current inflationary environment that we're living in right now?

[Tiff Macklem]

You're certainly right that when you look at government spending and you want to map that from government spending to the implications for inflation, the amount matters, but also what the spending is matters. Different types of spending have different multipliers. Some spending is much more related to demand. Other spending is adding to supply. The more that the spending is adding to supply and not demand, the more it will actually help moderate inflation, so yes, I think to the extent that government spending is augmenting the supply, it will be better for inflation than if it's purely increasing demand.

There are a lot of things you can do on housing. Some of them may go more toward stimulating demand and others may go more toward stimulating supply.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Where there's more of a direct line between government expenditure and the creation of a unit, as opposed to government putting money out in the economy that could be used to bid up the price of existing housing stock, you would tend to look at that as less likely to cause inflation, and maybe it could even have a salutary effect and help bring inflation down if there were more supply in the housing market. Is that a fair interpretation?

[Tiff Macklem]

It's a good summary.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Okay. I think it's important, because some of your comments are taken to reflect on fiscal policy, despite your best efforts. I think it's important for Canadians to understand that there are types of government investment that can actually contribute to reducing inflation while solving some important problems, and that not all government spending is equal in that regard.

That matters a lot for conversations here on Parliament Hill about how much government should be investing in housing. That's particularly in the case of, I would argue—I'm not expecting you to have an opinion on this as a matter of fiscal policy, so these are my views—social and affordable housing, where government investment tends to be more directly tied to the creation of new units, than some of the financing facilities that government sometimes puts out for private developers and other things, which do ultimately issue in certain kinds of housing that are often at the higher end of the housing spectrum and don't really help on the affordability measure.

Is it not the case that the cost of housing is one of the biggest current drivers of the inflationary arc?

[Tiff Macklem]

It is an important driver of inflation and, as I indicated, the ongoing price increases are one of the things that are making it difficult to get inflation down.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Blaikie.

Members and witnesses, we're moving into our second round.

I have MP Chambers for five minutes, please.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

Welcome back, Governor and Senior Deputy Governor. Thank you for being here.

I'm just curious. There's a lag to monetary policy that I think you've talked about before. Is there a lag to fiscal policy?

[Tiff Macklem]

There are lags to fiscal policy. Again, it depends a lot on what it is. If you give a fiscal transfer directly to households, the lag probably won't be very long. If you embark on, say, an infrastructure spending program, the lag is probably going to be a lot longer.

The difference between monetary and fiscal policy is that in monetary policy we really have one target and one instrument. We raise and lower interest rates. We have reasonably good estimates of lags. Yes, there is always uncertainty about those lags. In fiscal policy, there are many different instruments.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

In the bank's analysis, have you looked at or considered.... I know you said that this year spending was below 2% or at 2%, but in the year prior, spending was up 25% versus pre-COVID levels on our run rate. Has the bank considered that in its analysis of whether fiscal policy is expansionary or not?

[Tiff Macklem]

Yes.

We've been through a massive economic cycle of a huge collapse in the economy and a very rapid rebound. There were forceful fiscal actions taken in the depths of the pandemic. Those certainly were key to a very rapid recovery, along with very stimulative monetary policy. That is something we've looked at.

We've also looked at.... As we've discussed previously with this committee, we were surprised by how much and how fast inflation went up. We've looked at those forecast errors to try to understand that and avoid making those mistakes again.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

Do you mind sharing with the committee the analysis you've done about showing spending by all levels of government? Could you table that with the committee—the bank's analysis? Is that something you would provide to the committee?

[Tiff Macklem]

Well, it's really all in the public domain. We publish our forecast every quarter. We come and we justify that to this committee every quarter. As governments have been announcing their fiscal plans, we've been building those into our forecasts each time.

[Adam Chambers, Conservative, Simcoe North, ON]

Okay.

I'll change the subject for a minute. I think back to our first interaction at the committee. One of the objectives of quantitative easing, as I understand it, was to help maintain a low interest rate—i.e., if the bank had not purchased government debt, upward pressure would have been put on interest rates. Is that about right?

[Tiff Macklem]

Yes. Interest rates go up further as the term stretches.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

This year, the federal government is borrowing $421 billion in the open market, and the bank is not purchasing that debt. Is it safe to say that this is a contributing factor to the rise in rates that we've seen most recently, even when the bank has not increased the policy rate?

[Tiff Macklem]

Well, government borrowing, actually, in public markets has gone down. During the COVID-19 crisis, they had very large borrowing needs. As they reduced their spending, their borrowing needs have come down substantially.

I guess I would add that you have to compare Canada to other countries. Canada's deficit-to-GDP ratio is the lowest in the G7. Canada's borrowing needs are a lot lower than those of many other countries—

[Adam Chambers, Conservative, Simcoe North, ON]

Governor, I have to break in here.

I quote from last week's press conference: “...the U.S. deficit means...a lot more bonds being issued...[meaning] increased supply has to be absorbed, [and that] push[es] prices up a bit.”

The U.S. is borrowing $2 trillion this year. Canada is borrowing $421 billion. That's a record, and no one is talking about that having been a contributing factor to interest rates.

Ms. Rogers, could you mention whether you believe government borrowing is a factor in causing interest rates to go up?

[Carolyn Rogers, Senior Deputy Governor, Bank of Canada]

Well, as we said in the press conference last week, there are a number of things. You're talking about just a sharp rise in the long-term yields on bonds.

As we said in the press conference last week, there are a number of things that are contributing to that. The term stretcher.... We talked about, as you said.... I think the quote you just gave was mine. I think the other thing I said is that we're not seeing that same increase in Canada. We haven't had the same effect of the long-term—

[Adam Chambers, Conservative, Simcoe North, ON]

With respect, the five-year rate moved up a bunch of basis points without the policy rate moving.

[Carolyn Rogers]

Yes, and there are a number of things contributing to that—