Evidence of meeting #141 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was inflation.
A recording is available from Parliament.
9:45 a.m.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
When you were here in October, you testified that the overall effect of the carbon tax at $65 a tonne was 0.6% of inflation.
Is that correct?
9:45 a.m.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
The combined effect today, to be absolutely clear, is that at $80 a tonne, the carbon tax contributes roughly 0.75% to inflation.
Is that correct?
9:45 a.m.
Governor, Bank of Canada
That's not quite accurate.
What matters for inflation is the increase in the carbon tax. That's the 0.1% to 0.15%.
You are correct that if the carbon tax was eliminated, there would be a drop in the price level of about 0.7%, so for one year, inflation would be 0.7 percentage points lower.
May 2nd, 2024 / 9:45 a.m.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
On that talking point about one year, I want to correct that as well. It's one year in perpetuity. You can only eliminate the carbon tax once.
My question to you is fairly simple.
If the carbon tax were repealed—which is what Conservatives will do when we are in office—and it were repealed in April, would that have been helpful in your decision to reduce interest rates and as a result help millions of mortgage holders in Canada reduce their payments?
9:45 a.m.
Governor, Bank of Canada
As I said before, and as you just said, if you eliminate the carbon tax, you can only do that once, so it will drop inflation for one year, by our estimate, by about 0.7%.
A year later, inflation will go back up 0.7% because the one-off decline in the price level will fall out of the rate of change calculation.
In terms of monetary policy, we have had tax changes like this in the past. I mentioned the cut in cigarette taxes in 1994. Changes in GST have a similar one-year effect. Those are things we tend to look through.
In fact, one measure of core that we typically follow is something called CPIX-FET—food, energy and taxes—for exactly that reason. What we're focused on is the underlying trend in inflation.
This conversation is a little hypothetical, but—
9:50 a.m.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
I'm really sorry. I have limited time.
Could you just answer the question?
If the carbon tax were eliminated, would it make your job easier in terms of reducing tax?
9:50 a.m.
Governor, Bank of Canada
Inflation would be lower for one year, but it would not be sustainably lower, so I don't believe it would have a big impact.
9:50 a.m.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
Okay.
I want to circle back to this issue of the delta between.... I realize you said we have flexible monetary policy in Canada, but there is a limit, as you said yourself.
How big can the delta be? We already have a weak dollar at 72¢. It's way too low.
I just had a meeting last week, for example, with the Canada Foodgrains Bank in Winnipeg. All their contracts are in U.S. dollars. They feed the poor in countries all over the world, so this has real-life impacts on people. The value of the Canadian dollar has life-or-death impacts. That's just one example.
How far are you willing to go to jeopardize the value of the Canadian dollar?
9:50 a.m.
Governor, Bank of Canada
Look, our flexible exchange rate works well. It's what allows us to run monetary policy that is geared to Canadians. I'm not going to draw a line in the sand.
Clearly, if we cut interest rates and that weakens the Canadian dollar, that is something you take into account with how much you need to reduce interest rates to get the same amount of monetary policy stimulus.
It is certainly something we're going to take into account, but the whole reason we have a flexible exchange rate in our own currency is so that we can gear monetary policy to the needs of Canadians. We intend to use that system to the benefit of Canadians.
9:50 a.m.
Liberal
The Chair Liberal Peter Fonseca
Thank you, MP Morantz.
Now we are going to MP Thompson for the next five minutes.
9:50 a.m.
Liberal
Joanne Thompson Liberal St. John's East, NL
Thank you.
Welcome back to the committee.
Thank you for the clarification on the pollution pricing and the carbon rebate. I cannot call it a tax.
I would like to stay on climate change, if I could. I believe it was my topic the last time you came to committee as well.
Given that climate change is becoming an increasing force or a major factor in the economy, and that this can also lead to increased supply disruptions, I would like to focus on this for a moment. In previous appearances, you stated that you were working on building a model on the effects of climate change into your main macro models or economic models.
Has there been any progress on this front? If so, I would be quite interested in hearing.
9:50 a.m.
Senior Deputy Governor, Bank of Canada
Yes, we are continuing our work on that.
One of the difficult things about using models for climate is that most of our models that help us forecast are based on history. The difficult thing about climate change is that we really don't have that kind of data from history to use. What the Bank of Canada and other central banks are doing is making good use of scenario planning, looking at different scenarios and using some of the climate science data to project what a future effect would look like.
We are going through a large exercise at the Bank of Canada right now, looking at our models. We're taking on board a lot of the things we've learned over the last few years. It's been a challenging time for central banks' ability to forecast, for a variety of reasons. One thing that we're really working hard on is trying to incorporate the effects of climate risk on the macroeconomy.
9:55 a.m.
Liberal
Joanne Thompson Liberal St. John's East, NL
Could you speak with a little more detail on what those climate risks are or what that looks like?
9:55 a.m.
Senior Deputy Governor, Bank of Canada
A big one is supply shocks, as you said. That would be one element. We look at transition risks, changes in relative asset prices. Those would be two good examples.
9:55 a.m.
Governor, Bank of Canada
There are roughly two types.
There are physical risks, such as flooding and forest fires. Obviously, those have very direct impacts on people and their livelihoods. They also disrupt transportation.
Then, as the senior deputy governor said, there are transition risks. We'll have less use of fossil fuels. We'll have a lot more electricity. That's just one example. There are some big adjustments that need to take place. How will those play through in the economy?
9:55 a.m.
Liberal
Joanne Thompson Liberal St. John's East, NL
Thank you.
Very quickly, again on risk, in your opening remarks you mentioned that one of the variables in terms of the economic forecast is global uncertainty. Could you speak briefly about the uncertainty in projections in terms of the real variables?
We tend to be very micro when we talk about it here at committee. I'd be interested in your thoughts.
9:55 a.m.
Senior Deputy Governor, Bank of Canada
The geopolitical risk usually translates into changes in assets that are priced globally. That's a lot of the commodities. The increase we've seen recently in oil is as a result of some of the geopolitical tension we have in the Middle East right now. That would be one risk.
The other way it would translate could be supply disruptions. If you have disruptions to trade agreements, that can have big effects on supply and on prices as well.
9:55 a.m.
Liberal
Joanne Thompson Liberal St. John's East, NL
Thank you.
I'll share some of my time with my colleague, who would like to add a point to her questions.
9:55 a.m.
Liberal
Julie Dzerowicz Liberal Davenport, ON
Thank you, Joanne.
Governor, you very kindly offered to follow up with calculations when I was thanking you. If you could give us a little bit more detail around the annual increase from carbon pricing being around 0.1%, we would be very grateful.
9:55 a.m.
Liberal
The Chair Liberal Peter Fonseca
Okay.
Ms. Thompson, you still have 30 seconds. Do you have a quick question?
9:55 a.m.
Liberal
Joanne Thompson Liberal St. John's East, NL
I do have a quick question.
I'd go back to the reference to guardrails. I don't think you ever had the opportunity to expand on that. I think it's important in terms of understanding your comments on outlook and where Canada sits in terms of our economic forecast.
9:55 a.m.
Governor, Bank of Canada
Well, I think I was largely done, but in terms of the guardrails in particular keeping the deficit and the debt on a downward track, I think it's been very helpful to put not only a number on it but also a date. A target with a date by which you have to achieve it becomes a more meaningful target.
On the objective to have the deficit-to-GDP ratio declining and being below 1% in 2026-27 and thereafter, I think that this commitment is helpful in that it gives some clarity about the overall path for fiscal policy. From a monetary policy point of view, I think it mitigates the risk that large government spending will throw recovery from inflation off track.