Finance Committee on March 3rd, 2022

[The Chair, Liberal, Peter Fonseca]

Welcome, members. I call this meeting to order.

Welcome to meeting number 24 of the House of Commons Standing Committee on Finance. Pursuant to the motion adopted in committee on January 12, 2022, the committee is meeting on inflation in the current Canadian economy.

Today's meeting is taking place in a hybrid format pursuant to the House order of November 25, 2021. Members are attending in person in the room and remotely using the Zoom application. The proceedings will be made available via the House of Commons website. The webcast will always show the person speaking, rather than the entirety of the committee.

Today's meeting is also taking place in the webinar format. Webinars are for public committee meetings and are available only to members, their staff and witnesses. Members enter immediately as active participants. All functionalities for active participants remain the same. Staff will be non-active participants and can, therefore, view the meeting only in gallery view.

I would like to take this opportunity to remind all participants to this meeting that screenshots or taking photos of your screen are not permitted.

Given the ongoing pandemic situation and in light of the recommendations from the health authorities, as well as the directive of the Board of Internal Economy on October 19, 2021, to remain healthy and safe, all those attending the meeting in person are to maintain two-metre physical distancing and must wear a non-medical mask when circulating in the room. It is highly recommended that the mask be worn at all times, including when seated. We must also maintain proper hand hygiene by using the provided hand sanitizer at the room entrance. As the chair, I will be enforcing these measures for the duration of the meeting, and I thank members in advance for their co-operation.

To ensure an orderly meeting, I would like to outline a few rules to follow.

Members and witnesses may speak in the official language of their choice. Interpretation services are available for this meeting. You have the choice at the bottom of your screen of floor, English or French audio. If interpretation is lost, please inform me immediately and we will ensure that interpretation is properly restored before resuming the proceedings. The “raise hand” feature at the bottom of the screen can be used at any time if you wish to speak or alert the Chair.

For members participating in person, proceed as you usually would when the whole committee is meeting in person in a committee room. Keep in mind the Board of Internal Economy's guidelines for mask use and health protocols.

Before speaking, please wait until I recognize you by name. If you are on the video conference, please click on the microphone icon to unmute yourself. For those in the room, your microphone will be controlled as normal by the proceedings and verification officer. When speaking, please speak slowly and clearly. When you're not speaking, your mike should be on mute. I would remind you that all comments by members and witnesses should be addressed through the Chair.

With regard to a speaking list, the committee clerk and I will do our best to maintain a consolidated order of speaking for all members, whether they are participating virtually or in person.

The committee agreed that during these hearings, the chair will enforce the rule that the response by a witness to a question take no longer than the time taken to ask the question. That being said, I request that members and witnesses mutually treat each other with respect and decorum. If you think the witness has gone beyond the time, it is the member's prerogative to interrupt or ask the next question, and to be mindful of other members' time allocation during the meeting.

I also request that members not go much over their allotted question time. Though we will not interrupt during a member's allotted time, I would like to keep you informed that our clerk has two clocks to time our members and witnesses.

I would now like to welcome today's witnesses. From the Bank of Canada, we have with us Governor Tiff Macklem. Welcome. We also have Senior Deputy Governor Carolyn Rogers. I would like to convey my sincere thanks to the governor and senior deputy governor. We understand this has been an extremely busy time for you. On behalf of the Standing Committee on Finance and its members, we want to thank you for honouring our request to come before our committee.

Governor, the floor is yours for opening remarks.

[Tiff Macklem, Governor, Bank of Canada]

Good afternoon.

Thank you for inviting me to participate in your study on inflation in the Canadian economy.

I'm pleased to be joined by Carolyn Rogers, the senior deputy governor of the Bank of Canada. This is her first appearance before the committee.

Since I was last here, the Bank of Canada and the Government of Canada have renewed our joint agreement on Canada's monetary policy framework. We agreed that the primary objective of monetary policy is price stability. Under the 2022–26 agreement, the cornerstone of our framework remains the 2% inflation target, at the midpoint of a 1%-3% control range.

Earlier today, I spoke to the CFA Society and explained our policy decision yesterday to raise our policy interest rate by 25 basis points to 0.5%. I also reviewed the drivers of the recent rise in inflation globally and in Canada. I know this is directly relevant to your study, so I have given my remarks to the clerk to share with committee members. I look forward to exploring these issues with you today.

Before moving to your questions, I'd like to talk to you and Canadians about three things.

First, I'd like to review the Bank of Canada's actions over the course of the pandemic, what we were trying to achieve, what happened, and what would have happened if we hadn't acted.

Second, I want to speak to the concerns many Canadians have about the rising cost of living. I know many people are worried about prices at the gas pump, and the costs at the grocery store. They worry about housing affordability and how to save enough for retirement. That angst has been compounded by everything we've gone through over these past two years of this pandemic.

Third, I want to talk about what's next. This latest wave of the pandemic is fading, and life is starting to return to normal, a new normal. I want to share what Canadians can expect to see in the economy, with inflation, and from the Bank of Canada.

At the outset of the pandemic, uncertainty skyrocketed, financial markets seized up, and economic activity fell off a cliff. About three million Canadians lost their jobs, and more than three million people were working less than half of their normal hours. Businesses closed up shop in record numbers. Inflation fell sharply, even dropping into negative numbers. We were staring down another Great Depression and the possibility of deflation. Deflation happens when prices across the economy actually fall. This might not sound so bad, but the truth is that persistent deflation is dangerous.

When unemployment rises rapidly and overall prices begin to fall, households may reduce spending if they think that goods and services will become even cheaper in the future. However, putting off spending results in less demand, leading to more job losses and business closures. This puts more downward pressure not only on prices but also on wages. Both can spiral downward, as they did in Canada during the Great Depression.

Deflation also makes repaying debt more expensive. This could have been a severe problem for a country like Canada, with high levels of household debt.

When the pandemic began and we were facing economic calamity, we took extraordinary actions. We lowered our policy interest rate as much as we could. We promised not to raise interest rates until slack in the economy was fully absorbed. We reinforced this commitment using quantitative easing.

Taken together, these actions kept borrowing rates low to stimulate spending and instilled much‑needed confidence in the economy so that businesses and households could recover.

Thanks to the resilience of Canadians, effective vaccines, exceptional fiscal policy, and the Bank of Canada's actions, Canada avoided deflation, and our economy has recovered. However, I recognize that this reassurance may not reflect how many are feeling.

Even before the pandemic, many Canadians were worried about how they were faring economically. Not everyone was experiencing the benefits of a growing economy and a healthy labour market.

The pandemic intensified people's concerns, layering worries about their health and that of their loved ones on top of uncertainty about jobs and businesses, the value of their savings, and the prospects for retirement.

Reopening the economy has brought new complications, leading to higher inflation around the world and here at home.

The COVID-19 virus continues to circulate and mutate. We are seeing social upheaval here in Canada and in other countries. In the last week, shocking developments have unfolded in Ukraine at great human cost. The unprovoked Russian invasion is creating volatility and uncertainty in the global economy. We are living in anxious times.

Needless to say, monetary policy is not equipped to address most of these issues, but it is equipped and mandated to control inflation. Here in Canada, inflation is just above 5%. That’s too high. With oil prices rising further in recent weeks, we can expect inflation to move up again.

I am sure people are wondering why prices are so high, so let’s unpack it.

The inflation story in Canada has three key elements. The first is that through the pandemic many people shifted to buying more goods and fewer services. At the same time, the pandemic disrupted the production and delivery of many items. This caused the prices of many globally traded goods to rise sharply.

The second is that price increases have seeped into an increasingly wide array of goods, including everyday items like food and energy. Oil prices are higher because of strong demand, limited investment in new production and geopolitical tensions. This means higher transportation costs, which further add to the price of goods.

Food prices are also being affected by extreme weather, which has reduced harvests, and strong demand for housing—in the face of limited supply—has pushed those prices up.

The third is the strength of the recovery in Canada and the overall balance between demand and supply in our economy.

The current inflation isn't because of excess demand in the economy. A wide range of indicators suggest that slack in the economy has just now been absorbed.

In the future, spending growth needs to moderate so that demand doesn't significantly outpace supply and create a new domestic source of inflation. To help control inflation, we need to tighten monetary policy. In other words, we must raise interest rates.

Let me wrap up by explaining what Canadians can expect from us going forward. Monetary policy has a clear role to play in keeping supply and demand in balance and getting inflation back to target. To this end, we have taken deliberate steps to adjust the degree of monetary policy stimulus as the economy has recovered. We slowed our quantitative easing and we stopped it outright last October.

We made it clear to Canadians in January that with the economy operating at capacity, our guarantee of rock-bottom rates had ended. We need higher interest rates to bring inflation sustainably back down and keep the economy in balance.

Yesterday, the governing council took the decision to raise the policy interest rate by 25 basis points to half a per cent. We indicated that we expect interest rates will need to rise further. We also said that we will be considering when to end the reinvestment phase of our large-scale asset purchases and allow the Bank’s holdings of Government of Canada bonds to begin to shrink.

This is a process known as quantitative tightening, or QT. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.

In closing, I want to emphasize to all Canadians that the Bank is determined to control inflation.

With that, Senior Deputy Governor Rogers and I would be very pleased to answer your questions.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor, for your opening remarks.

We are going to be moving to our first round of questions from members.

In this round, each party will have up to six minutes for questioning the governor and senior deputy governor. We are starting with the Conservatives.

Mr. Chambers is up for six minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

Welcome, Governor and Senior Deputy Governor. It's nice to have you here for the first time. This is a very important study for us, and we very much value the Bank's view on these issues. Inflation is affecting the everyday lives of Canadians.

Governors, it's the first time I've seen you since your appointments. Congratulations.

Our time will go by quickly, so I'll ask for your co-operation to be as brief in your answers as possible, and I'll try to be brief in my questions.

Governor, in your speech today and what you've just outlined, you're starting to paint a picture of a different world, at least one that you thought might exist a year ago or even just in October. If you listen to the finance department today, their world view seems to diverge; it's a bit different.

The finance department is telling us that inflation is still temporary, that it's beyond the government's control and that the economy needs more investment and stimulus. We all know that the plan is for some fairly large deficit spending planned in the next budget.

Today, you outlined that the risks of inflation are here to stay, that they're lingering, that we can expect more interest rate hikes to deal with these risks, and that the economy is robust and the slack has been absorbed, which means it is operating near capacity. The question is this: Have you made your views on this well known to the government? Have you warned the Department of Finance of the risk to inflation of continued stimulus and large deficit spending?

[Tiff Macklem]

We make our views known to all Canadians; certainly I do by mandate have regular discussions with the Minister of Finance, and we share our outlook with the Department of Finance.

With respect to the economy, I think the important point to stress is that the economy has just gotten back to its capacity. It has recovered from the pandemic, and we are seeing considerable momentum. Omicron certainly dented growth in the first quarter—we lost 200,000 jobs in January—but if you look at a broader set of indicators, it looks like growth in the first quarter is holding up quite well.

As you're well aware, restrictions are easing, so we expect to see some increased strength going forward. What all that means is that the economy can handle higher interest rates, and we've been very clear in signalling to Canadians that they should expect a rising path for interest rates.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you; I appreciate that forward-looking guidance.

The question is more around the risks of increased fiscal expansion. We've had testimony at this committee from a number of economists who have all said that increasing government spending and deficit spending will mean an upward pressure on inflation. Would you agree with that statement?

[Tiff Macklem]

I'm going to leave fiscal policy to our elected government. My job is to control monetary policy.

What I can tell you is that we will take the government's fiscal plans into consideration. We will put those in our outlook, and then we will do what we think is necessary to bring inflation back to target.

[Adam Chambers, Conservative, Simcoe North, ON]

I understand that may be an uncomfortable question for you, Governor, but it has not prevented your predecessors sitting in the chair that you're sitting in from telling Canadians that they shouldn't be worried about deficit spending, because the economy is operating under capacity and we can handle deficit spending. The flip side now is that we're operating at capacity, and growth is robust. The question still is this: Won't additional fiscal policy lead to some higher inflationary pressures?

You spent some time in the Department of Finance. I know you think about these things, and I have great respect for your view on this. I just think that the view that you're presenting today and the view from the Department of Finance seem to be diverging.

[Tiff Macklem]

What I can say is that decisions on what to spend on and what to tax are decisions for the elected government to take. Those are decisions for parliamentarians to take.

When you're considering the impact of government deficits and government spending, you need to look at both the overall amount and what it's being spent on. The more spending creates additional supply in the economy—

[Adam Chambers, Conservative, Simcoe North, ON]

I have about a minute left.

[Tiff Macklem]

—the less it's going to cause inflationary pressure. You need to look at both the amount and what it's being spent on.

[Adam Chambers, Conservative, Simcoe North, ON]

Okay. Thank you.

The head of OSFI gave an interview in which he indicated that house prices could fall up to 20% as interest rates rise. Is that a view shared by the Bank of Canada?

[Tiff Macklem]

Well, let me talk about the base case and then about the risks around that.

In our base case projection, housing activity, as you're well aware, is very elevated. There are a number of reasons for that, which we may have the opportunity to explore.

[Adam Chambers, Conservative, Simcoe North, ON]

Are we in a bubble?

[Tiff Macklem]

In our projection, we expect that the growth in housing activity will moderate. We do expect, though, and it's built into our projections, that housing activity is going to remain quite strong. Immigration is coming back up. Population growth is strong. People have jobs. Wages are going up. Incomes are healthy. All of those things are going to support strength in housing.

We do expect it to moderate. Raising interest rates will be a factor that will help moderate it, but we expect it to gradually diminish.

[Adam Chambers, Conservative, Simcoe North, ON]

I think that's my time, Governor. Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Chambers.

We are moving to the Liberals.

Madame Chatel, you have six minutes, please.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you, Mr. Chair.

Mr. Macklem, thank you for being here. We know that this is quite a busy period for you. We sincerely appreciate the opportunity to spend some time with you.

I would like to come back a bit to something you said, which was really important, about how it depends on what we spend on as a government. At the core, inflation is a result of supply and demand. If we spend to increase the supply, that relieves the pressure on inflation. That was a good clarification. Thank you for that.

My question to you, Governor, is about global inflation and the global response to inflation by using monetary policy. As one example, I have in front of me the OECD chart on inflation, including the forecast for OECD members. It all follows the same pattern. There may be some isolated cases there, but overall, there's a global phenomenon of inflation. The forecast seems to be good news in 2022-23, but could you please put the inflation in Canada into global perspective?

[Tiff Macklem]

Let me just begin by saying that it is a pleasure to be here. Yes, we're busy. We're all busy, but this is very important, and we're very pleased to be here.

As you've highlighted, the same factors that have driven inflation up in Canada have driven it up globally. The supply constraints are a global phenomenon. Households shifting out of services into goods, because they can't consume a lot of the services they would normally consume during a pandemic, is a global phenomenon. Higher energy prices and higher food prices.... These goods are all priced in international markets, so you are seeing very similar inflation dynamics in most countries around the world.

In Canada's experience and in some advanced countries like the U.S., inflation is a bit higher than it is in the U.S. In some other countries, it's a little lower, like in France. Canada's experience is not dissimilar to those of many other countries, but for Canadians, knowing that people in other countries are facing this inflation is a bit of cold comfort. Canadians are still paying higher prices for groceries, higher prices for gasoline and higher prices for many goods. That's hitting them in the pocketbook. It is critically important that we bring this inflation back down. We also know that it hits the most vulnerable Canadians the most, those least able to afford it.

That's why we need to raise interest rates. We need to raise interest rates to keep demand and supply in balance, as I discussed. We also need to raise interest rates to keep inflation expectations well anchored. When these global supply disruptions, these shipping bottlenecks, ease back, inflation will come back down if we keep inflation expectations well anchored. If we don't, if they become unmoored, it will be much more difficult to get inflation back down.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you, Mr. Macklem.

I want to ask about Canada's target, which was set in 1991. We have a fairly stable monetary policy and a 2% target, as you explained. The monetary policy, of course, is set by the bank's governing council. The council is autonomous and independent from the government.

How will your tools help reach that target? Based on the OECD predictions, the news looks good and we seem to be on top of things. Are you confident that we'll bring our target back to 2%?

[Tiff Macklem]

Yes, I'm hopeful, but it will take time. We have the tools, but it will take time to moderate spending growth and to reduce inflation.

As you just said, we've had an inflation target since 1991. Since 1995, that target has been 2%. Since then, the average inflation rate has been very close to 2%. There have been fluctuations, but we've always come back to a 2% inflation rate.

The current inflation rate is the highest that we've seen since we set an inflation target. However, since then, we've also been experiencing a pandemic for the first time. It's a unique situation.

Overall, I'm hopeful.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you. This is—

[The Chair, Liberal, Peter Fonseca]

Thank you, Madame Chatel. That is the time. I know it goes quickly.

We are moving to the Bloc, and Mr. Ste-Marie, for six minutes.

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

Thank you, Mr. Chair.

Governor Macklem and Senior Deputy Governor Rogers, thank you for being here.

Mr. Macklem, thank you for your presentation and for your responses to the members' questions.

There's the issue of inflation related to the pandemic. You painted a clear picture of the past two years. Now, another major event has occurred, the Russian invasion of Ukraine. According to several economists, including Nouriel Roubini, there has been a paradigm shift. The risk of stagflation on a global scale is very high.

What are your thoughts on this major risk?

[Tiff Macklem]

The most significant impact of Russia's attack on Ukraine is being felt by the Ukrainian people. It's very difficult to see the human cost of this invasion.

Of course, this attack has increased global uncertainty. That said, in terms of trade, Canada's direct ties with Ukraine and Russia are very minimal. There isn't much of a direct impact on Canada. However, there are several indirect effects. The most significant effect concerns commodity prices. I'm thinking in particular of the cost of oil, which has increased significantly since the attack began. Today, a barrel of oil costs about $110 in American currency. This will increase inflation in Canada and around the world.

In addition, the prices in the agricultural sector are increasing, such as the price of wheat. This can affect the price of our food purchases.

Moreover, the financial markets have been highly volatile. The prices of government and corporate assets and bonds have changed. There has been more demand for American dollars. When people are scared, they all want the protection of American dollars.

Obviously, economic confidence has decreased. This attack is affecting the world order. That said, it's only the start of the second week of this war. It's hard to know what will happen. However, I can say that we'll consider the impact on Canada as we make our decisions.