Finance Committee on March 3rd, 2022

[Tiff Macklem]

Look, innovation that creates more opportunities for consumers, I'm...yes, I think that would be a good thing. I think one has to be careful about innovation. We have to make sure these are innovations that are robust and that will.... You know, we saw a lot of innovation in the mortgage market in the United States in 2004-05-06, and it ended very badly. Fortunately, in Canada we were not as innovative. We did have some of that going on in Canada, but it was much smaller.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

What would be some positive innovations, from your perspective?

[Tiff Macklem]

Well, I don't really have any specific suggestions. I mean, these are decisions for businesses to engage in.

I don't know if our senior deputy governor, Ms. Rogers, has some perspective on that.

[Carolyn Rogers]

I think the member is talking about some suggestions for longer-term mortgages. I remember when Governor Poloz spoke to you about that.

I think, as the governor said, innovation that comes along not at the expense of stability is good innovation, so certainly terms would be one thing to look at.

[The Chair, Liberal, Peter Fonseca]

Thank you for that.

Thank you, Mr. Albas.

We are moving to the Liberals.

Mr. MacDonald, you have five minutes.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you.

Thank you, Governor and Deputy Governor, for being here today. These are very interesting conversations that we're having, clarifying a lot of issues and a lot of questions that many people are asking.

I want to go back to your quantitative tightening relative to the bonds. Can you describe when and how you analyze removing those bonds from your balance sheet?

[Tiff Macklem]

There are various phases, so we were engaging in quantitative easing; we began in October 2020 what we call tapering or reducing the amount of quantitative easing we were providing, so buying fewer bonds. We started with five billion per week; we went to four, to three, to two and then we ended quantitative easing, which means we entered something we call the reinvestment phase, in which we only buy enough government bonds to replace the bonds that are maturing on our balance sheet.

Right now, we are in the reinvestment phase. What we indicated yesterday is that we will be considering moving to the next phase. We had indicated that we would stay in reinvestment until we raised the policy rate. Yesterday, we raised the policy rate, so the logical next step is to consider not replacing the bonds that are maturing on our balance sheet, which is called quantitative tightening, and we indicated that we would be considering quantitative tightening and when to start it. As I said earlier today, I think you can take from that that at our next monetary policy decision in April we will have a live discussion about ending reinvestment and beginning quantitative tightening.

When we get to quantitative tightening, what that means is we won't be replacing the Government of Canada bonds that are maturing on our balance sheet, so our holdings of Government of Canada bonds would diminish. To give you a picture of the speed of that, about 40% of the government bonds on our balance sheet would roll off over two years.

[Heath MacDonald, Liberal, Malpeque, PE]

We hear all the time that we're moving too quickly or that we're not moving quickly enough relative to monetary and fiscal policy. What happens if those contract too quickly at the same time?

[Tiff Macklem]

What happens if there's too much tightening too quickly is that the economy is going to slow. Inflation will fall below the 2% target; there will be more people out of work and there will be less income in the economy. If there's less income in the economy, there's less spending and people aren't buying goods, so companies start discounting those goods and inflation comes down and gets too low, below our target. If you look at our projection, we have quite solid growth this year and next, with inflation coming back to target. Yes, it's a delicate job trying to balance those things, and we're going to assess that at each decision going forward.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you.

I want to come back to non-traded commodities, which I think a couple of members have already spoken about a little, and the effect of the Russian invasion of Ukraine.

People on the street are wondering about those non-traded commodities and the effect the war is going to have on them. I know you touched on some of it, but I'm interested in seeing how deep you can go on that to give us a more precise answer.

[Tiff Macklem]

In terms of the effects on Canada through commodity prices, just to be clear, what we're talking about is the price of oil, the price of natural gas, the price of wheat, the price of potash, the price of nickel, commodities that Russia and—

[Heath MacDonald, Liberal, Malpeque, PE]

Governor, the non-traded commodities though, I thought I would be dealing with health and education, that kind of stuff.

[Tiff Macklem]

I apologize. I misunderstood.

When you say non-traded commodities, do you mean services?

[Heath MacDonald, Liberal, Malpeque, PE]

Yes.

[Tiff Macklem]

In terms of the impacts on Canadian services, I don't expect there will be much impact. Global uncertainty has increased; there's more volatility in financial markets and we could see some supply disruptions, which could weigh on growth, but I don't see very big impacts on things like health and education in Canada.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, Mr. MacDonald.

We are moving to our third round, members. We have the Conservatives up first.

Mr. Lawrence, go ahead for five minutes.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you very much.

Thank you for appearing today, Governor.

I want to go through and focus on a particular area of inflation, and that's with respect to energy.

In seven of your last 11 press releases, you stated that energy, either gasoline or oil, was the cause or significant driver of inflation. If we were able to produce more energy, more oil, in Canada, and we were able to be more energy independent than we are currently—such as by not importing oil from Russia or other countries around the world—would Canada be in a better position to control inflation?

[Tiff Macklem]

We're big exporters of oil in global markets. Oil's—

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Governor, if we were able to increase the amount of oil and gas that we were able to put into the global market—and you've stated in seven out of 11 press releases that this is a major driver—that would reduce inflationary pressures.

[Tiff Macklem]

On the margin, if Canada produced and exported more oil, it could reduce the pressure on global markets.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

I can tell you that in my town of Orono, whereas you talk about excess savings, they're talking about how they can't pay their heating bill. They're talking about the fact that they can't afford their gas and their oil bills. If we saw, for example, a decrease of 10% in the gasoline, oil or fuel costs of Canadians, would that impact inflation?

[Tiff Macklem]

Yes. It would bring it down.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

The carbon tax equates to about a 10% additional cost on oil and gas. If we were able to give Canadians a holiday for a period of time, would this help them cope with the additional pressures they're facing as a result of inflation?

[Tiff Macklem]

In our monetary policy report, we report on the impact of the carbon tax on inflation. It's about 0.1% per year. The reason for that is that the carbon tax is increasing over a very long period of time.