Finance Committee on Oct. 29th, 2024

[Tiff Macklem]

What we've said—and I think we've been very clear since we started cutting rates—is that if the economy continues to evolve broadly in line with our forecast, we anticipate further cuts in our policy rate.

We've also been very clear that the exact timing and the size of those cuts are going to depend on incoming data. With the data leading up to our decision last week, CPI inflation came down significantly. The economy is growing, but the recent indicators show it as a little more slowly in the second half than in the first half. You looked at the broad.... You looked at our surveys. You looked at inflation expectations. The message was that it's appropriate to take a bigger step, and that's what we did.

Looking forward, yes, I think the message to Canadians is that it's reasonable to expect that interest rates will continue to come down. The next questions, the questions that often feed into this are these: How low are they going to go? Where is the terminal point? My message is that we're going to have to discover where we land. We don't know exactly where we land. We have this concept of the neutral interest rate, which is where the interest rate would be when inflation is on target, when economy is at capacity and when there are no shocks disturbing the economy. We can't observe that directly, so we have to kind of discover where that is.

Then the other reality is that there will be shocks. There will be disturbances. There will be new events. There will be surprises. The interest rate is the thing that we adjust to keep inflation on target. Remember, we have an inflation target. I think the message to Canadians is that our commitment is to try to keep inflation low and stable. We're going to do the best we can at that, and we've been pretty good at that over time. The interest rate is the thing we use to do that, so it will have to respond. Yes, I think the direction of travel is down, but we're going to have to see where that destination is and we're going to take it one decision at a time.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you, I appreciate that.

I have about a minute and a half, and I have two questions. One, I hope, is a brief one, and one may be a little longer, so I'll be quick.

The first one is this: Are you able to give us just a quick update, very briefly? My understanding is that the Bank of Canada was doing some work on incorporating the impact of climate change into its macroeconomic models. In other words, what's the impact of climate change on the cost of and other aspects of our economy? Can you just quickly update us on where that stands?

[Tiff Macklem]

I don't have much new to say from where we were the last time we were here. We are still working on that. We don't have those models in production yet. This is not a small undertaking.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

This is my last question. I have a constituent by the name of Joe Polito, and he asks me a question regularly about the Bank of Canada. He points out that the Bank of Canada pays interest on settlement balances; those are bank deposits at the Bank of Canada. He's told me that, historically, the Bank of Canada didn't always used to do that, but we do that now.

The question he asked me is this: Why do that? Isn't that a great benefit...? We're paying a lot of money. The Bank of Canada is paying a lot of money in interest on these settlement balances at the banks. It's a great benefit to the banks. Why would we do that? Wouldn't we save a lot of money by not paying that interest on those settlement balances? Could you tell us why we do that?

[Tiff Macklem]

The short answer is this: That's how we control the overnight rate.

[Carolyn Rogers]

The other thing Joe maybe has told you is that, in the past, we didn't have a lot of settlement balances. We ran a system where we maintained very low settlement balances. We expect to get back to a lower level, but, yes, that's the overnight rate. That's how we implement monetary policy.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Baker, and I hope Joe Polito is watching.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

I guarantee he's watching.

[The Chair, Liberal, Peter Fonseca]

Now, we're going to MP Ste-Marie, please.

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

Thank you, Mr. Chair.

Mr. Macklem, the markets predicted that you would lower the key interest rate by half a point, contrary to the opinion of the chief economist at TD Bank, who is also the bank's senior vice-president. She was calling for a quarter-point drop, saying that in September, low inflation rates were largely due to gas prices. More importantly, she said that the Bank of Canada hasn't suddenly brought rates down during a monetary cycle in the absence of signs of a recession since the early 2000s. This happened in 2001, however, when the United States fell into a recession.

I would like to hear your reactions to those statements. Also, should this half‑a‑point drop be interpreted as a harbinger of a recession? Is there a risk that it could be interpreted as such?

[Tiff Macklem]

I don't think we should consider that we are in a crisis or a recession.

Remember, we've had extreme fluctuations in the last few years: COVID-19, the highest inflation rate in 40 years and the fastest increase in Bank of Canada key interest rates in history.

When you normalize interest rates, you have to follow steps that are a little longer than usual. That reflects the fact that there have been major changes. We even saw an increase of 100 basis points in one go. Since some steps are longer than usual, this means that the repercussions are much greater than usual.

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

Thank you.

Earlier, you talked about how important exports to the United States are to the Canadian economy. Since the pandemic, however, the Americans seem to have taken a more protectionist stance. Are you concerned by the fact that Canadian exports to the United States haven't returned to prepandemic levels?

[Tiff Macklem]

We have a free trade agreement with the United States.

In terms of trade with the United States, Canada was the biggest exporter to the U.S. in the year 2000. However, between 2000 and 2019, U.S. imports from China increased significantly. Canada fell to third place in terms of imports to the U.S., behind China and Mexico. Now, with the new tariffs and all the restrictions, China has lost ground and Mexico is number one. Canada is the number two exporter to the U.S.

So there are opportunities for Canada. Global supply chains and trade are changing. Canada and the United States enjoy a close relationship. We know the Americans well. We're successful in doing business with them. I do have concerns about our trade relationship with the United States which could change, but I'm nevertheless optimistic since there are also opportunities for Canada.

[The Chair, Liberal, Peter Fonseca]

Thank you very much.

We will go now to MP Davies.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chair.

Governor, I'd like to ask you about the impact of immigration. In the Bank of Canada's October monetary policy report, GDP growth was projected to continue at around 2% through the first half of 2025 before increasing modestly to about 2.5% in the second half and reaching 2.3% in 2026.

That projection assumed that population growth would decline from about 2.5% in the second half of this year to an average quarterly growth of 1.5% over the rest of the projection. However, we know that the immigration reduction targets announced by the federal government last week are expected to result in a population decline of 0.2% in both 2025 and 2026, before returning to growth in 2027.

Given that a population decline means that fewer consumers and workers will be participating in the economy, what impact will the federal government's immigration reduction targets have on the central bank's growth forecasts?

[Tiff Macklem]

Thank you for the question.

Yes, as you outlined, shortly after we'd published our forecast the government published a new levels plan for their immigration. As you indicated, we have a pretty sizable reduction in population growth in our current forecast.

As to what's going on in our forecast, there are two things. Population growth is coming down. As you highlighted, less population growth means fewer new consumers in your economy, so that is going to be less growth in demand. At the same time, with lower interest rates, we have consumption per capita coming up. Over the next few quarters, they roughly balance off, so growth is about 2%.

The upshot of the government's new levels plan is that they've lowered the target for permanent residents. There are also more concrete targets on the net flows of non-permanent residents. Those are below the assumptions we have in our forecast—

[Don Davies, NDP, Vancouver Kingsway, BC]

Quite significantly.

[Tiff Macklem]

Yes, quite significantly.

In our next forecast, which is in January, we will take a look at that. We will incorporate it. We will certainly take that into account.

I will say that there are a lot of moving parts here on immigration. There are inflows and there are outflows, and you have have to net those. When you look at non-permanent residents, there are students, there are asylum seekers and there are temporary foreign workers. There are special visas for Ukrainians. Decisions will have to be taken on all those pieces. We'll be looking at all that and we'll be incorporating it.

But yes, I mean, if you take what they put out, it would imply a lower GDP growth forecast.

[The Chair, Liberal, Peter Fonseca]

We'll now go to MP Chambers for the next five minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

Governor Macklem and Senior Deputy Rogers, welcome. It's very nice to have you back.

I want to talk about prominent payment systems for a moment. I'm going to try to link this to the productivity discussion.

My understanding is that Interac's e-transfer service is considered a prominent payment system under the Bank of Canada. Is that correct? It's been designated.

I also understand that Interac is in non-compliance with the standards that the bank sets out with respect to at least two of the standards. Primarily, one, the criteria for joining Interac is public; and two, its pricing mechanism should be risk-based, not volume-based.

The problem I have here is that, one, there's no transparency. The bank has requested through the standards that there be transparency. Two, the fee schedule is secret, but we know that it's volume-based based on testimony yesterday at the industry committee.

Are there any enforcement actions being taken against Interac to bring it into compliance?

[Carolyn Rogers]

I think we're talking about two different things. There is a set of global standards for payment systems that articulate the kinds of things you're talking about. Our enforcement powers relate to the Retail Payment Activities Act.

When you talk about an enforcement actions—

[Adam Chambers, Conservative, Simcoe North, ON]

You regulate e-transfers. Is that correct, or...? I'm sorry. They're considered a prominent payment system for e-transfers. Is that right?

[Carolyn Rogers]

Yes.

[Adam Chambers, Conservative, Simcoe North, ON]

The Bank of Canada has listed the standards it expects those entities, the prominent payment systems, to comply with. Interac is not in compliance. It has admitted it. It's not a secret.

Is the Bank of Canada pressuring it to do the things you've asked it to do?

[Carolyn Rogers]

Yes, we are working with it. I'm sorry, but you used the words “enforcement actions”. Are we working with Interac on those standards? Yes.