Finance Committee on Feb. 1st, 2024

[The Chair, Liberal, Peter Fonseca]

Now we go to MP Weiler, please.

[Patrick Weiler, Liberal, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

Thank you, Mr. Chair.

I want to thank the governor and deputy governor for appearing at committee again.

I want to pick up on a line of questioning from Mr. Morantz earlier. You made the point that not all government spending is considered to have the same impact on inflation. I wonder if you could comment on government spending that might actually speed up the supply of housing, whether through direct investment in non-market housing or investment in programs that work with municipalities to allow them to speed up the permitting, zoning and delivery of housing, and whether that would be inflationary or disinflationary.

[Tiff Macklem]

We're not housing policy experts. I can't really add much more to what I said before. Policies—and you mentioned a couple—on things that improve supply will be particularly helpful in the current situation. Yes, I think to some extent those would provide for speeding up of permitting, taking some of the uncertainty out of the process and making it more predictable.

The other thing we've seen, if you look at the actual construction of houses, is that the time to completion has been going up. That's partly regulatory and partly industry practices. If we can get the time to completion to go down, shorten the time between a permit and a start, and then shorten the time to completion, we can get more houses through the pipeline.

I'm going to leave it to experts on housing policy to figure out what is the most effective way to do that.

[Patrick Weiler, Liberal, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

Thank you.

I was wondering if you might be able to share the numbers with this committee, the overall inflation numbers if you remove the inflation we're seeing in shelter costs right now. Could you just comment on that? You spoke to the supply shortage right now, and the limited impact of raising interest rates on being able to address that.

How does that factor into your decision-making on monetary policy going forward?

[Tiff Macklem]

If you just want a number, if you take CPI excluding shelter, it's going up, at 2.4%. You can see that shelter is making a big contribution. Currently, inflation is 3.4%. It's making sizable contribution.

In terms of our policy, though, I would emphasize a couple of things.

First of all, Canadians are paying shelter costs. They are real costs. I don't need to tell you. You're even more aware than I am. It's really having an effect on Canadians. You can't just ignore them. This is really affecting Canadians.

The second thing is that even if you strip out shelter costs and you look at the rest of inflation, shelter is not the only source of underlying inflationary pressures. That is one way to look at it. The number I gave you is for shelter. It's the biggest thing that's contributing on the upside. There are also some things that are unusually weak on the downside.

If you use a more systematic approach to strip out the unusual ups and the unusual downs, inflation looks to be at about 3.5%. If you look at our core measures, CPI-trim and CPI-median are 3.6% and 3.7%; CPI excluding food and energy, which is a very simple way to strip out some of the big movers, is 3.4%. That's telling you the centre of the distribution is still above 3%.

Another way to look at that is to look at the number of components of the CPI that are rising faster than 3%. That's still over 50%. More than 50% of the basket is still rising. Normally, that number is quite a bit lower.

Shelter costs are an important factor, but they're not the only factor.

[Patrick Weiler, Liberal, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

Governor, yesterday Statistics Canada released a flash estimate that showed that real GDP increased 1.2% annualized in December, which does suggest some strong momentum heading into this year.

Can you comment on those figures and the overall resilience of the Canadian economy?

[Tiff Macklem]

I'm always hesitant to react to one number, because in economies you have to look at a lot of numbers to put it all together.

In our monetary policy report, which we published before that number came out, we expected Q4 GDP to be roughly zero growth. That number by itself would suggest that November was 0.2% and the flash for December...which Statistics Canada would caution you is a flash estimate. It's not a hard number. They have more data coming in.

If you take those at face value, it would suggest something bigger and probably stronger than zero for the fourth quarter. I still think the fourth quarter is going to be a fairly weak number, certainly well below potential output growth.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Weiler.

MP Ste-Marie.

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

Thank you, Mr. Chair.

At the start of the year, you carried out major liquidity injection and reverse repo operations. How much did these operations amount to and how many days did they last?

It's a standard but rarely used tool. When was the last time it was used? In your opinion, why wasn't the market interest rate at the estimated level? What happened? Has the situation been resolved?

You can answer my questions in the two minutes that I have left.

[Tiff Macklem]

Okay.

Your question is complicated, but I'll do my best to answer it in French.

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

You can respond in English.

[Tiff Macklem]

No. We have two official languages in this country, so I should respond in French.

In January, for two days, I believe, we carried out overnight reverse repo operations. The amount wasn't exactly the same each time, but it was around $5 billion. These are daylight loans, so after one day, the amount is repaid. We can't accumulate the $5 billion. The last day of the operation was January 23, I believe. We haven't done the operation for about a week.

I want to focus on some aspects of these overnight reverse repo operations. These operations are routine and standard. They aren't a sign of financial stability issues. This doesn't mean that there are issues in the system. Certain market frictions exist to ensure that money goes exactly where it's needed in the economy. From time to time, we need to carry out this type of operation.

We do this because, when we make a monetary policy decision, we decide on the overnight policy interest rate target. We decided that we want an overnight policy interest rate of 5%.

Recently, there has been some upward pressure. The overnight rate is higher than our 5% target. We don't want interest rates to rise more than we had anticipated in the monetary policy.

These operations are symmetrical. From time to time, the rate is below our target. We carry out reverse repo operations, meaning that we use deposits, not loans, to withdraw and increase the system's liquidity.

I think that I answered your question.

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

It isn't much—

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste‑Marie.

Mr. Blaikie, you have the floor.

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

I have two questions. I hope you may be able to answer the first in a follow-up to the committee. I doubt you'll have the answer today. I hope to get your comment on the second today.

Here's the first. New Democrats support carbon pricing in some way, shape or form. We don't always agree with the government on exactly how it's doing it. However, we have proposed to remove the GST on home heating.

You've been able to calculate what the one-time effect on inflation would be of removing the carbon tax. I'm wondering if you might be able to calculate what the one-time effect of removing the GST on home heating would be. We'd prefer that option because it applies to all Canadians, including those who use renewable energy to heat their home with hydroelectricity, for example.

We prefer that approach because it applies to all parts of the country. As you know, the federal carbon price applies only to some parts of the country and not others, like British Columbia, for example. Eliminating the carbon tax on home heating doesn't do anything for Canadians living in provinces with their own carbon tax regimes, so that's why we prefer the GST approach.

I would be very curious to get the bank's opinion on what the inflationary effect of removing the GST on all forms of home heating would in fact be, and then we could have a bit of a comparison with that approach.

To Mr. Lawrence's point, because the GST is applied to the carbon tax, it would also have a mitigating effect on the carbon price increases going forward, although it wouldn't completely eliminate them.

If you could return to the committee in writing on that point, it would be very much appreciated.

The second question has to do with the climate change discussion that was had earlier. Canada is notoriously behind some of our trading partners, particularly in Europe—and, arguably, the Americans—on having a taxonomy for classifying various kinds of green investment and having a requirement for publicly disclosed corporate transition plans.

I wonder if you could speak to the utility of having those publicly disclosed plans required of Canadian companies and having a clear, established taxonomy for the bank to be able to do the work you were talking about in trying to better incorporate climate effects into your own forecasting.

[Tiff Macklem]

Well, climate policy and taxonomy are in the realm of elected officials.

As a general comment, I think disclosure and agreeing upon rules of the road in taxonomy—so people can agree on what this is relative to that—are useful bits of infrastructure that would allow people to make more informed investment decisions.

I think those things would generally be helpful, yes.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Blaikie.

Now we're going to MP Chambers.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

Welcome back to the committee. It's always nice to have you here.

I think we've exhausted the spending discussion, but there are two ways government can affect demand. One is through spending, and we've gone there. The other is through population growth. We haven't talked about that, but I note it's becoming more of a theme in the monetary policy reports. The last couple have definitely singled out population growth.

Would you say that population growth is significantly adding to demand and making your job difficult?

[Tiff Macklem]

I'll make two points.

Undoubtedly, population growth is significantly adding to demand. It's also significantly adding to supply.

I'll start with supply. You can see this very clearly in the labour market with a large number of newcomers. That has helped ease the pressures in our labour market. Our labour market was very overheated. It's now in much better balance. In fact, I think this was in a previous monetary policy report. We had a chart that linked those: The sectors where there has been the most immigration are also the sectors where we've seen the most rapid rebalancing of the labour market. There's clearly a link there.

Equally, there's clearly a link on the demand side. What our analysis tends to indicate is that, for consumption more broadly—not shelter, which is separate—the economy has done a pretty good job of absorbing that demand. There's enough flexibility in supply that the.... Obviously, if you have more people, you have more consumers and shoppers, but there's been enough flexibility in supply to accommodate that. It hasn't had material inflationary consequences.

Shelter is a different story, and we already talked about that. We've had a long period in Canada during which the demand for shelter has been growing faster than the supply. The acceleration of immigration—both permanent and non-permanent residents—has further increased the demand. Supply was already not keeping up, so there hasn't been the flexibility on supply. It is boosting shelter costs, and that's showing up in inflation.

[Adam Chambers, Conservative, Simcoe North, ON]

I appreciate that. Thank you very much.

Population growth and government spending, I note, aren't appearing as risks to your projections. I think Canadians are curious as to whether policy-makers are thinking about these things. I'll explore this with you at another date.

Is the senior advisory committee functioning well? There's not a lot of transparency. The bank is not talking about these items in public. Have you been able to raise these items behind closed doors, appropriately, to flag vulnerabilities for the government?

[Tiff Macklem]

We have.

The senior advisory committee, for those who don't happen to know what that is, is a committee of the—

[Adam Chambers, Conservative, Simcoe North, ON]

Let's assume they know. I don't have a lot of time.

[Tiff Macklem]

Yes, we have been discussing these issues. From time to time, we invite CMHC to participate in the discussions, given that they are the principal Crown corporation responsible in the housing domain. Yes, those discussions are happening.

I'm not going to speak for the government, but you saw the cap on students last week, so I think there is a level of awareness.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

Before I turn it back over to you with a last question, I'll apologize on behalf of all of Parliament for not listening to you two years ago when you came here and said, half-jokingly, to stop spending. I think that was very forward-looking of you. However, we didn't deliver. Parliament increased spending by over 25% versus pre-COVID levels, and we haven't done our job. We haven't done our job on spending, and we haven't done our job on population growth.

Here is my last question in the last 30 seconds. There's an election coming up. It could be in a couple of months; it could be in two years. It's very rare for a politician to resist the temptation to buy votes. It's also rare for voters not to want to take that. What advice would you have for those seeking to buy votes in the next election?

[Tiff Macklem]

Well, the one thing I never do is give political advice, so I'm not going to break that rule now.