Evidence of meeting #161 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was rate.
A video is available from Parliament.
Governor, Bank of Canada
The U.S. is doing better. Relative to Europe, the Canadian economy is doing quite well. It depends who you compare it to. It also depends on what exactly you're measuring. You're going to do better on some things and not so well on other things.
Liberal
Rachel Bendayan Liberal Outremont, QC
Perhaps a last word, Mr. Chair, if I have time.
It's about the impact of lower interest rates on housing and the importance of that for the people who are watching us at home. Housing has been a major issue, and we would like to bring relief, particularly to young Canadians.
Would you like to comment on that?
Carolyn Rogers Senior Deputy Governor, Bank of Canada
We expect lower interest rates will bring people back into the housing market. We do think there are some people who have been waiting for rates to come down. Rates are one thing that will help, but we still need the push on the supply side, because that will, ultimately, be what sort of rebalances housing affordability in Canada. However, we do think rates are going to give some relief, particularly to new entrants.
Liberal
Rachel Bendayan Liberal Outremont, QC
I take that to mean that it's important for us to continue to invest in housing and ensure that the supply side is there.
Liberal
The Chair Liberal Peter Fonseca
Thank you, Ms. Bendayan. That's the time.
We'll now go to MP Ste-Marie.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you, Mr. Chair.
Welcome, Mr. Macklem and Ms. Rogers, and thank you for coming today. I have several questions.
First, I have a somewhat technical question on the same topic. Towards the middle of September 2023, the government announced that it was eliminating the goods and services tax on buildings intended for rental housing. Has the bank seen an impact on housing prices as a result of this measure?
Governor, Bank of Canada
No. For us, that's really a microeconomic [Inaudible—Editor].
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
I am going to jump to a different topic. Donald Trump recently repeated his intention to impose high import tariffs if he is re‑elected. He has already proposed a 10% tariff on all imports. He is now talking about a 20% tariff and is even considering increasing it to 50%. For Chinese goods, the tariff would be set at 60%.
Given the importance of Canada-U.S. trade relations and the interwovenness of the global economy, what could be the effects of such tariff policies on the Canadian economy and Canadian monetary policy, particularly as we seek to maintain a low and stable inflation rate?
Governor, Bank of Canada
As I said before, I'm not going to comment on policies in Canada, and I'm certainly not going to comment on policies in the United States.
However, I can tell you that the international environment is becoming increasingly difficult. The war in the Middle East and Russia's invasion of Ukraine are ongoing. We are seeing more and more economic fragmentation between countries, more tariffs, more restrictions on trade, all creating strong headwinds in the world. We'll see who wins the election in the United States. That may determine how those very real headwinds are managed. For businesses, the commercial trade environment has indeed become more complicated.
Issues of economic or national security are increasingly influencing decisions pertaining to tariffs and trade rules. This is a challenge for Canada. However, one of Canada's advantages is that it enjoys an excellent trading relationship with the United States. Everyone knows that the United States is the top destination for our exports, but perhaps not everyone is aware that Canada is the number one market for U.S. exports. It's a bilateral relationship, which is good for both countries.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you very much.
I'd like to move on to something else.
Inflation has been decreasing with no recession in sight so far. However, I would like to take you back to the early 1970s and try to draw a parallel. At the time, inflation had come down significantly, leading many observers to believe that it was under control, but then it shot back up. Some might believe that we are in a similar inflationary cycle right now. The inflation rebound in the late 1970s was due in part to an excessively loose monetary policy, with real interest rates remaining negative despite high inflation.
Given that markets are now anticipating significant reductions to key interest rates this year and in the near future, do you believe there is a risk that monetary policy will become too loose, which could lead to a similar inflationary spike?
Governor, Bank of Canada
We have presented our forecast. Yes, there are risks on both sides of the equation. Now that inflation has returned to 2%, the possibility of overshooting our forecast is as much a concern to us as it is undershooting it.
Last week, I took part in meetings of the IMF, the International Monetary Fund, in Washington. I think the advice given to central banks at those meetings was good. Most of the major central banks are in the process of normalizing their interest rates, and the IMF advises us to do so cautiously, that is, not too fast, not too slow, just at the right speed. The economic situation varies slightly from country to country.
You saw that we started lowering our interest rates before the United States. That reflects the slightly different situations in our two countries. We can make our decisions here in Canada based on our needs. That's why we have a flexible exchange rate.
Liberal
NDP
Don Davies NDP Vancouver Kingsway, BC
Thank you, Chair.
Thank you, Governor and Deputy Governor, for being with us.
Governor, year-over-year inflation appears to now be 1.6%. That's below the Bank of Canada's stated target. Some feel it's likely to fall further in the coming months.
Can you please reconfirm that 2% is your target for inflation, and not a ceiling?
Governor, Bank of Canada
Absolutely, 2% is a target. We treat 2% entirely symmetrically.
NDP
Don Davies NDP Vancouver Kingsway, BC
Thank you.
You said a few months ago that the bank had to continue tightening, even when inflation reached the 3% upper band, because it was important to get right back to 2%. I think we took from this that it wasn't good enough just to reach the band.
Now that inflation is below 2%, can you confirm it's equally important to lift inflation back to 2%? Is that your goal?
Governor, Bank of Canada
Yes, I think we've been pretty clear. We have inflation down to 2%, and we want to keep it there. With respect to the fact that inflation is 1.6%—obviously, 0.4 percentage points under 2%—I think that, month to month, you're going to see some volatility. Obviously, we can't hit 2% every month. If you look at our projection, we expect that, in the next few months, it is going to tick back up closer to 2%, and it may even go a little above 2%. It's going to depend, to some degree, on what happens with global oil prices.
I think we've been very clear that we have inflation down to 2% and that we don't want it to keep falling. We want it to stay close to 2%. That's our job, and that has been an important factor in our interest rate decisions.
NDP
Don Davies NDP Vancouver Kingsway, BC
Thank you.
The Bank of Canada's October 2024 monetary policy report states, “The housing vacancy rate remains near record lows. Interest rate cuts,”—which, of course, you've talked about, the 50 basis points—“pent-up demand and the recent changes in mortgage rules could spur more demand for housing than expected in the projection.”
Governor, will the expected boost in demand put upward pressure on housing prices?
Senior Deputy Governor, Bank of Canada
When we talk about risks on both sides, that is a risk that we continue to monitor. As I answered the question earlier, we are expecting some pickup in housing activity. There are people wanting into the housing market who have been waiting for rates to come down; that'll help. We are expecting some increase. If that activity picks up too much, it could start to put upward pressure on house prices again.
NDP
Senior Deputy Governor, Bank of Canada
I think it would depend a lot on what else is going on in the economy. If we're back in our range.... This is why it's important to stay in the range, as the governor said. Whether it's oil or some other sort of shock that's happening to the economy that isn't a more generalized increase in prices.... That's the sort of inflation that we get concerned about: when it's a generalized increase in prices.
NDP
Don Davies NDP Vancouver Kingsway, BC
I guess this is the perverse multifactorial world that we're living in where we get these salutary effects. It allows more people to afford houses, but it puts more demand in the market, which can drive prices up. Of course, I think there's not an MP in this room who isn't concerned about high prices for housing in their riding.
How much of the current year-over-year inflation of 1.6% is due to higher mortgage debt charges?
Governor, Bank of Canada
I don't have the precise number, but mortgage interest costs certainly significantly contribute to inflation. If you look at shelter costs—which also include rent and home insurance—what you're seeing is that all those pieces are high. Shelter, overall, is going up at about 8%, and that's contributing more than a percentage point of inflation, so it is a very large component.
With regard to the mortgage interest costs, what we're seeing is that, with the cuts to the interest rates, those are starting to come down. There's some evidence that rents are starting to come off. If you look particularly at data on new rents, you will see that those rent increases are quite a lot lower than the stock of rents in the CPI. We have become more confident that shelter-price inflation is rolling over and starting to come down. That's certainly good news, but that confidence.... That's the biggest upward pressure on inflation. With that coming off, that has given us more confidence that we can lower interest rates to get growth up, that the two will balance out and that we'll stay closer to 2%.