Finance Committee on Feb. 1st, 2024

[Tiff Macklem]

—and high unemployment. We don't have high unemployment. Yes, unemployment has come up, but it was extremely low. It's back to more normal levels.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

It is ticking up now.

[Tiff Macklem]

It is ticking up, and I expect it will go up a bit more.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

I'm saying this because a chief economist—

[The Chair, Liberal, Peter Fonseca]

That is the time. We went over time.

It's over to MP Baker now.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you for being here again at the finance committee, Governor and Senior Deputy Governor.

I'd like to start along the same lines, Governor, as what you were discussing with my colleague about government spending plans and their impact on inflation.

The government presented the fall economic statement. It's the mini budget, if you will, of the government presented every fall. You said the FES is “not adding new or additional inflationary pressures over the next couple of years, which is the critical period over which we will be looking to reduce inflation and get it back to the target”.

Can you expand on that? I want to make sure the folks at home are very clear. Is the latest fall economic statement, which is the latest spending plan of the government, adding undue inflationary pressures to the Canadian economy?

[Tiff Macklem]

What I was referring to in that quote was relative to the track the government laid out previously. The fall economic statement didn't add material new spending that would add new inflationary pressures. We built the previous budget, as well as the fall economic statement, into our projection.

As I mentioned in a previous answer, for next year, that gives you a growth in government spending at all levels—obviously, the provinces are a big part of this—of roughly two and a quarter per cent.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Am I hearing you say that, if growth and spending are around two to two and a quarter per cent—you referenced this in your earlier response—that's a level at which government spending is not unduly contributing to inflation?

[Tiff Macklem]

If it's in the range of 2%.... The economy is growing at roughly 2%. The population growth is at roughly 2%. It's growing in line with the size of the economy. In that sense, it's not helping to get rid of inflation, but it's not contributing new inflationary pressures.

As I underlined, two and a quarter per cent is at the upper end of that. If there are new spending initiatives, either federally or provincially, they could start to make it more difficult to get inflation down. They could start adding new inflationary pressures.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

You mentioned a moment ago that, when you looked at government spending plans in the fall economic statement or the government's budget, you saw government spending growing at 2%—if I understood you correctly—this year and two and a quarter per cent next year—

[Tiff Macklem]

Just to correct, we don't actually have all the data for last year yet. It's roughly 2% last year and two and a quarter per cent this year.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Forgive me. Thank you. It was 2% last year and two and a quarter per cent this year.

The data you have says that government spending grew at 2% last year and is planned to grow at two and a quarter per cent this coming year. What I'm hearing you say is that, as long as spending growth is close to that 2% target—and you've called a growth of two and a quarter per cent close to the upper range of that—it's growing more or less in line with population growth, so it's not unduly contributing further to inflation.

Is that a fair characterization of what you're saying?

[Tiff Macklem]

Yes.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you for that, Governor.

What I'd like to do is ask you something my constituents ask me all the time. I promised several of them that I would ask you the next time you came to the finance committee.

What many of them are struggling with is their mortgage costs. Many of those who already have mortgages have been renewing their mortgages at much higher rates than they did in the past. Some of them are approaching the point where they have to renew their mortgages and are very concerned about their ability to service those mortgages, get approved for those mortgages and frankly keep their homes, in many cases.

The question I get asked all the time, Governor, is this: When will interest rates come down? I know you can't give us a specific date, but what would you say to my constituents who are watching at home and asking, “When is the Governor of the Bank of Canada going to bring rates down?”

[Tiff Macklem]

Well, the first thing I'd like to say to all Canadians is that we know that Canadians want to see inflation come down. They're tired of seeing prices go up so quickly, and we know that they'd like to see interest rates come down. So would we.

When we have more assurance that those inflation pressures are easing and that inflation is clearly headed back to 2%, we can have that discussion about cutting interest rates. However, right now, monetary policy is working, and we need to let it keep working.

If I can just expand a little bit.... When I was here last October, I got a very similar question. What's happened since October? Well, since October, the data we've seen with the economy, what we've heard from households and what we've heard from businesses in Canada have made us more confident that interest rates are now high enough to get inflation back to our 2% target.

That doesn't mean that.... You know, if new things happen, we may still have to raise interest rates. However, what it does mean is that if you take all of the data we have and if you take our outlook, it's suggesting that interest rates are high enough to get us back to the inflation target.

Your question is about when we can cut them. We can't put it on a calendar. We need to see how inflation evolves. We've seen this push-and-pull in inflation. We've talked about housing. That's boosting inflationary pressures. More broadly, we are seeing inflationary pressures come out. We need to see how that evolves, and when we see those easing further, when we see sustained downward momentum in underlying inflation, we can have that discussion.

I hope that comes sooner rather than later, but we're going to have to see how inflation evolves.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Baker.

Now we'll go to MP Ste-Marie, please.

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

Thank you, Mr. Chair.

Thank you for joining us, Ms. Rogers and Mr. Macklem.

My opening remarks may be a bit long.

Like you, we see the need to keep inflation within a range of 1% to 3% to bring inflation down to the 2% target, and the fact that this creates inequalities.

Your restrictive monetary policy is having a negative impact on the housing sector.

Ms. Rogers, you referred to the chronic housing shortage at this time.

For example, over the past year, in Quebec, housing starts have fallen by 60%.

I wanted to ask about the tool used to establish the policy interest rate. The policy interest rate is a bazooka that strongly affects the economy as a whole and that can have unwanted effects, particularly in the housing sector. I'm thinking in particular of tenants. When a building owner renews a lease at a higher rate, the owner's choices for production and development aren't directly affected. Given the competitive nature of the housing sector, the bill is passed on to the end consumer, the tenant. This may not be the person placing the most inflationary pressure on the economy. Obviously, as politicians, we're all very concerned about these effects.

I would like to ask you about the policy interest rate, your main tool. This tool was introduced by the central banks as soon as they were created.

What other tools do you have for implementing a restrictive anti‑inflation monetary policy that wouldn't have such a wide range or negative impact?

How much have you studied this issue?

How much of your current research focuses on various other tools?

What measures taken in other parts of the world could help us implement an effective anti‑inflation policy and continue to support housing construction?

[Tiff Macklem]

The short answer is that the policy interest rate is our main monetary policy tool. We call it a blunt instrument. It affects everything. We can't target sectors. This makes the monetary policy more difficult, but also explains its effectiveness to some extent. We can't avoid raising interest rates. It affects the whole economy, everyone and every business. It has a predictable effect on demand and inflation.

The other tools are here in your hands. The government can take targeted measures, such as taxes, subsidies and budget measures for different sectors. At the Bank of Canada, we're happy to see all levels of government—municipal, provincial and federal—working together more closely to use different tools to ease the housing shortage. This will take time. Our high interest rates have reduced demand. However, since supply is still lacking, the sector continues to struggle. Alongside the supply aspect, measures can be taken by the various levels of government.

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

Thank you.

When I see the inflation rate of around 3%, which is above the 2% target and not ideal, when the main impact of the policy interest rate hike is a 60% drop in housing starts, and when there's a housing shortage and a great deal of homelessness, I start wondering things as an elected official. For the overall well‑being of the economy, perhaps it would have been better to slow down the fight against inflation, if these issues are interconnected, and to support housing construction.

Just to clarify, you're concerned about inflation, and not the housing shortage. Politicians must take care of the shortage. Is that right?

[Tiff Macklem]

We're concerned about the housing shortage. We need to understand the shortage. However, we don't have the tools to solve it.

I want to point out that high interest rates affect the housing sector. However, the impact is greater on the demand side than on the supply side. Yes, supply is affected. If you speak to developers, they'll tell you that. That said, when we look at the sector as a whole, the impact on demand is much greater than the impact on supply. In addition, in recent years, demand has been much greater than supply. Rising interest rates have reduced demand. The market is more balanced. However, since supply has been insufficient for a long time, there's still a shortage.

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

Thank you.

I'll have more questions during my next rounds.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste‑Marie.

MP Blaikie, go ahead, please.

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

I want to pick up pretty much where that conversation left off.

I do think it's important to say that when we talk about balancing supply and demand in the housing market, while demand on paper has gone down, there aren't fewer people in Canada who need a place to live. I mean, demand for housing is completely inelastic. There's just as much demand for housing as there ever was. There are just more people living on the street who aren't bidding on houses because it's completely outside their financial possibility.

I think it is important for us to recall, as policy-makers, that the demand for housing is in fact equal to the number of people who live in Canada. The question of how many people are bidding on houses matters, and I'm not saying that isn't an important metric, but when we bring those two things into alignment, so that there's roughly a good number of people bidding on houses for the amount of supply, it doesn't mean that demand has gone down. It means that people are just displaced out of the market, and they're the people we're seeing living in encampments in our cities, on the streets and everywhere else. I think it's important for us just to bear in mind that we're not really talking about a balancing of demand and supply. We're talking about demand segments disappearing off the ledger and living on the streets.

One of the things that I think Canadians have really been challenged with when it comes to housing, if we think about the time before interest rates went up.... On low interest rates, certainly there is a school of thought that would say low interest rates were raising the sticker prices of houses and, in that sense, contributing to housing inflation. Since interest rates went up, people have really been feeling the pinch, because even though the sticker price may be coming down, their ongoing operating costs of owning a home and servicing the mortgage have also been important drivers of inflation.

Now, as we talk about a period on the horizon when interest rates will go down—albeit we're not sure when that's coming, exactly—are you concerned that it means housing will continue to drive inflation? As people can borrow more money with the same income, we'll go back to the race that was on before interest rates went up, where sticker prices are quickly escalating and also driving people out of the housing market.

[Tiff Macklem]

I think you've described, actually, the difficulty in the housing market quite well.

Exactly as you described, when interest rates were very low, demand for housing was very strong. We saw a large appreciation of house prices. As you're well aware, house prices through COVID went up more than 50% over two years. That wasn't all interest rates. Part of it was that people wanted more space during COVID, but interest rates were certainly a part of that.

That actually pushed up shelter price inflation. Shelter price inflation has actually been quite high for several years. What's changed with the increase in interest rates is the composition. It was largely because the house prices were going up a lot before, and mortgage interest costs were very low. Now, mortgage interest cost is high, but house prices are not going up very much. They came down a little bit and they've kind of stabilized. They're going up slowly.

I think also, to get back to Mr. Ste-Marie's question, what this highlights is that you're not going to solve housing with low interest rates and you're not going to solve it with high interest rates. We've tried both, and we've had high shelter price inflation. It comes back to this: The durable solution is to increase the supply, and that includes both the supply of homes and the supply of purpose-built rental.

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

Do you think it's something government should be contemplating? Of course, if you have any suggestions, we're very happy to hear them, but even in a general sense, if government has a sense that at some point interest rates are going to begin to come down, is there a set of policy tools? Is there a difference in terms of what policy tools might help with that rapid sticker price inflation in housing versus the inflation we've seen over the last number of years when interest rates have been higher?

Is there a different kind of tool box the government should be looking to as they prepare for a potential change in direction at the bank? Are there tools that make more sense now, given the nature of the problem we're facing around renewals versus “How do I get enough to bid on a new home?”