Evidence of meeting #124 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was rates.
A video is available from Parliament.
Conservative
Liberal
The Chair Liberal Peter Fonseca
Thank you, MP Chambers.
That is a good rule.
We are moving on to our last questioner, and that's going to be MP Baker.
February 1st, 2024 / 12:55 p.m.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
Thank you, Mr. Chair.
Thank you, again, Governor and Senior Deputy Governor, for being here.
I have a few questions, so I hope we can get them all in.
I'd like to come back to something that one of the other members raised. I just want to ask you for clarification, Governor. My understanding is that overnight repo operations are normal functions of monetary policy. I want to ask you to confirm whether that's correct. Can you just briefly explain how your international counterparts, like the Fed in the U.S. or the European Central Bank, use this tool of monetary policy?
Governor, Bank of Canada
You're right. Overnight repos are a standard part of our operating framework. We haven't used them for some time. Really, the pandemic interrupted that because there were a number of extraordinary tools used. However, now things are getting more back to normal, so you're seeing us use this tool again.
As you suggested, we are seeing some tightness in overnight markets. There's probably more than one reason for that. One factor, which I think is a more global factor—we have been talking to other central banks, and they are seeing similar types of pressures—is that, as you're well aware, bond rates went up quite a bit in the last couple of years. More recently, they've started to come down as market participants expect that the central banks are winning the fight against inflation, so they're expecting that we will lower interest rates. That is spurring increased demand for those bonds because they want to buy them before interest rates come down further.
That has to be funded. Some of that funding is in the overnight market, so it's creating some upward pressure. As I responded to the previous question, we have been using overnight repos to keep the actual overnight rate in the market very close to our target overnight rate, which is the rate that we decide on when we make monetary policy decisions. Really, this is simply about implementing the monetary policy that's intended.
Senior Deputy Governor, Bank of Canada
I'll just follow up on your question.
I was on a call with our colleagues from other central banks on Monday of this week, and I was actually at the Fed on Tuesday. What is happening in Canada is happening in other central banks. They're also using their equivalent of the tool in the overnight rate for largely the same reasons the governor described.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
That was very helpful. Thank you, both, for that.
I have about two minutes left, if I'm not mistaken.
There's been a lot of discussion here about what's contributing to inflation, the cause of inflation. A number of members have asked questions or suggested that it's the government's fault and that the decisions that the government has made have unduly contributed to inflation. We've had a discussion about the government spending. Earlier in my questioning, Governor, you answered the question about the fact that if we're close to that 2% growth in spending, we're not unduly contributing to inflation.
I want to ask you the question that a lot of my constituents also ask me: What is causing inflation? The last time you were here, I asked you about that. We talked about things like global supply shocks. We talked about the war in Ukraine and its impact on energy prices and food prices. For the sake of my constituents, but also for clarification here among the MPs, could you explain what the major reasons are for high inflation, not just in Canada but in many countries around the world?
Governor, Bank of Canada
I could go on for a long time, but I know I don't have a lot of time, so I'm going to keep this brief. The big burst of inflation we saw in 2022—up to 8%—started largely as a result of global factors. The global demand for goods was very strong. People couldn't get the services because of COVID. They couldn't go to the gym, so they bought gym equipment. All of those goods had to be produced and shipped. At the same time that the supply chain was still really gummed up because of COVID, Russia's unprovoked attack on Ukraine further increased oil prices and food prices. In the beginning, it was largely because of global factors. Those have actually come down significantly.
The second factor was that as the economy reopened from COVID—and this wasn't unique to Canadians—people everywhere wanted to catch up on all the things they had missed out on. They wanted to go to restaurants. They wanted to take holidays. Companies simply could not keep up with demand. They couldn't hire people fast enough, so we got a big burst of more domestically created inflation.
Now the inflation is more domestic and less global. We've raised rates forcefully. Doing that has slowed the economy and—to come back to where I started—it's working. Demand has slowed and supply has caught up. That has increased our confidence that we've raised rates enough to get us back to 2% inflation. Once we get more assurance that we're on that path back to 2% inflation, we can start thinking about cutting interest rates, but we're not there yet.
Liberal
The Chair Liberal Peter Fonseca
Thank you for that. It paints a great picture.
Thank you, MP Baker.
Thank you, Governor Macklem and Senior Deputy Governor Rogers, for answering the many questions on monetary policy and smartly not answering some of the other questions that were not directed at monetary policy. We really appreciate your coming here at the start of the year. We're all hoping for a much better 2024 than 2023. I know Canadians are waiting to hear your next report to address inflation as well as interest rates. Thank you.
This meeting is adjourned.
