Finance Committee on Oct. 30th, 2023

[Julie Dzerowicz, Liberal, Davenport, ON]

I think all Canadians would agree that we're all looking for that as well.

Very quickly, because I have another couple of questions for you, Governor, how would you compare Canada's current economic situation to that of our peer countries in the G7?

[Tiff Macklem]

There are many dimensions to compare. In all our countries, we all went through COVID at virtually the same time. Every country plunged into recession. Every country has come out of that. We all experienced much higher inflation and then inflation coming down in all our countries.

If you look at Canada's comparative recovery, you see that the Canadian economy has recovered quite well. It hasn't recovered quite as strongly as the U.S. economy by some measures—certainly not by GDP. On the employment front, we've actually had a very strong recovery.

Our recovery has been stronger than that of some of our European neighbours. Inflation in Canada didn't go as high as it did in Europe, not even quite as high as it did in the United States. Inflation has come down in all our countries, and it's now not that different across most advanced countries.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you for that.

There is a belief, at least when I talk to the constituents in my riding of Davenport, that if you increase rates, that actually leads to more inflation. How would you respond to Davenport residents who might be saying that?

[Tiff Macklem]

Your Davenport residents are right that when we raise interest rates, it increases the cost of borrowing. For many households, if they have a mortgage, particularly if it has been at a variable rate or has been reset recently, they have seen a substantial increase in the cost of carrying their mortgage. There is that direct affect, and that's something we take into account, and we build that into our analysis.

However, higher borrowing cost slows spending on a wide range of goods and services. It slows the housing market. It slows the spending on durable goods, and we've seen that start to spread to services. You can see very clearly—and in fact we document this in the “Monetary Policy Report”— that the areas where higher interest rates are biting the most are the precise areas where inflation is coming down the most. If you look at many durable goods like furniture and household appliances, those prices have actually been declining.

For many semidurables like clothing and footwear, inflation has come down considerably, and many services, excluding shelter, which is a separate topic, have come down. All those categories have inflation now at or below 2%.

You can see that higher interest rates are working to relieve price pressures. We have some way to go, as you suggested, but yes, if interest rates had not increased, inflation would be higher.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor.

Thank you, MP Dzerowicz.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much.

[The Chair, Liberal, Peter Fonseca]

Now we will go to MP Ste-Marie, please.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

I am just going to raise my point of order, Mr. Chair.

[The Chair, Liberal, Peter Fonseca]

You have a point of order, MP Scheer.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

In my previous point of order, I reminded the chair that there had been a rule adopted: the length of time for answers should be commensurate with the length of time it took to ask the question. You said that I was wrong. I just want to draw to your attention a motion that was adopted on Thursday, December 16, that includes paragraph e):

That during questioning of witnesses at all future hearings, the Chair of the committee apply the following rule: that the time to respond to each question not exceed the time taken to ask it, unless with the permission of the member who has the floor....

That motion was adopted.

I just wanted to remind you for future meetings.

[The Chair, Liberal, Peter Fonseca]

Thank you for that, MP Scheer.

MP Scheer, I know you're not a regular to this committee and I don't know how many times you've been at this committee, but members are fully aware that we've allowed for questions and answers in a very respectful way. I've also allowed members to go beyond their allocated time for questions, depending on when the question was asked and when it was answered. If someone had asked a question and they got to about five minutes and 50 seconds, within that six-minute segment, I would allow the answer to be had, and maybe it would go to 6:30, as the last one did.

That's how we've conducted our work here with the support of the members. This is how we've done all our meetings here, MP Scheer, but I'm at the will of the members to continue to conduct our meetings the way we have been. Be it the Conservatives, the Bloc, the NDP or the Liberals, I think everybody has enjoyed or liked the way we have been conducting those meetings.

Now we go on to MP Ste-Marie, please.

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

Thank you, Mr. Chair.

First, I'd like to welcome the Governor of the Bank of Canada, Mr. Macklem, and Ms. Rogers, the bank's senior deputy governor. I want to thank them for appearing so frequently before the committee to answer our questions. Thanks to them as well for delivering a large portion of their statement in French. I thank them for that, as always.

For starters, I want to go back to the questions that my two colleagues previously raised regarding your October 25 statement suggesting that federal government spending is fuelling inflation.

Is that in fact what you're saying? Would you please tell us, considering the answers you've already given, whether that's currently the case?

[Tiff Macklem]

The rate of growth in government spending is currently below 2%. The potential growth rate of supply in the economy is approximately 2%. If growth in government spending remains below that rate, it won't significantly contribute to inflation.

What I'm saying is that, upon examining the plans of the federal and provincial governments for the 2024 year, we estimate that the rate of growth in budget spending will be approximately 2.5%, which is greater than our forecasted growth rate of potential output.

If all those plans come to fruition, budgetary spending could grow faster than supply, and that wouldn't help moderate inflation.

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

That's very clear. Thank you very much.

If that scenario materialized and government spending exceeded forecasts by half a percentage point to 2.5% instead of 2%, would that have a significant impact on the economy as a whole?

[Tiff Macklem]

You're right: half a point is not much, but it nevertheless presents a risk. That figure could rise, especially if governments spend more. At some point, it could become difficult to moderate inflation.

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

Thank you very much.

Moving on to another topic, I'm referring to an article that was published in the Journal de Montréal three days ago, reporting comments made in an interview that you gave to the CBC. I'm going to discuss that article briefly and then ask you my questions.

The article is entitled, “Bank of Canada pondering no future prime rate hikes”. The first sentence in the article reads as follows: “The Governor of the Bank of Canada believes no further prime rate hikes will be needed to curb inflation across the country.”

Then it cites your remarks, which were translated. What we understand from this is that the rate could remain at its present level for some time. The Bank of Canada might consider lowering the prime rate only if, and I'm quoting your translated remarks, “we see clear evidence that inflation is heading toward the bank's 2% target.” So it won't be before then. However, you say it may no longer be necessary to raise rates.

Do the content of the article and the remarks reported in it reflect your thinking? Would you care to add any comment?

[Tiff Macklem]

I'll add one point to your summary.

In one of the scenarios considered, once we've raised interest rates high enough that we can anticipate a decline in core inflation, then we can be sure we've done enough. However, as noted in our report and in all my comments, risks of inflationary pressures remain.

In the other scenario, the inflation rate remains too high and we see no decline in core inflation. If that materializes, we're ready to raise interest rates further in order to lower inflation to the 2% target.

Our conclusion from last week is that we're seeing encouraging signs that our measures are working, that we've been patient, but, if any risk of inflation arises, we'll be prepared to raise interest rates.

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

Thank you once again for your answer.

I have a final, very brief question for you.

Five days ago, an article entitled, “Governor of Bank of Canada lectures provincial premiers,” was published in Le Devoir, referring to premiers who had written to ask you not to raise interest rates.

Your answer to them was that care should be taken not to compromise the bank's independence.

Would you please comment on that risk and the importance of maintaining the bank's independence?

[Tiff Macklem]

As you just mentioned, six or seven weeks ago, I received a number of letters from several premiers who wanted to influence my decision. I told them that we were quite content to hear the premiers tell us about the impact that inflation and rising interest rates were having in their province and how those developments affected their fellow citizens.

However, I also told them that it wasn't helpful for them to give us instructions on how to handle interest rates because that might create the impression that monetary policy isn't independent of government. But I think everyone agrees on the futility of such instructions.

The independence of the central bank is important if we want to maintain price accessibility.

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

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste-Marie.

Now we go to MP Blaikie, please.

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

Thank you very much.

Thank you, Governor, for attending here today.

Maybe I'll start by asking how elastic or inelastic you think demand for housing is for any particular Canadian. Regardless of what happens to price, even if it goes through the roof, it's fair to say that Canadians still need and want a roof over their head, regardless of price. Is that a fair assessment?

[Tiff Macklem]

Well, people obviously need shelter, but if they can't afford it, they can't buy it.

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

Indeed, but the need doesn't go away. Would you say that in this present moment, we're experiencing a serious supply shortage in the Canadian housing market?

[Tiff Macklem]

We've seen a building supply shortage for at least a decade now. The supply of housing is not keeping up with the growth in demand. That is creating a more acute problem.