Finance Committee on March 3rd, 2022

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

Mr. Macklem, I'll ask my question again.

As you said, the first victims of this invasion are the Ukrainian people. All our thoughts are with the Ukrainians, with whom we stand in solidarity.

I'll come back to my question. Are you concerned that the invasion will significantly increase the risk not only of inflation, but also of stagflation?

I should point out that, according to Nouriel Roubini, the impact is likely to be higher than what occurred during the two crises in the 1970s.

What are your thoughts on this?

[Tiff Macklem]

I want to emphasize that there's a great deal of uncertainty. Obviously, there will be an inflationary effect. However, the less obvious effect is the impact on growth and gross domestic product in Canada. Global confidence will be shaken, of course. That said, Canada exports many of its commodities, such as oil and wheat. One impact on Canada is that its export earnings will increase.

There will be multiple effects and we must consider all of them. It's really hard to give a specific answer at this point.

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

That's fine. Thank you.

When we're faced with a stagflation situation or a supply crisis, what tools can the central bank use to follow a monetary policy designed to help us recover?

[Tiff Macklem]

In the 1970s, when we experienced stagflation, we learned that, if inflation expectations aren't anchored, we end up with a serious inflation issue and the economy doesn't work very well. During the 1970s, there were many strikes and conflicts in the labour market. Everyone was angry. They felt that nothing was being provided to compensate for the inflation.

We learned from that period that it's very important to anchor inflation expectations. The solution at that time would have been to target inflation directly. There was an attempt to target the growth rate of the money supply. However, the relationship wasn't very stable, so it didn't work well.

Ultimately, the decision was made to target inflation directly. This monetary policy framework has worked very well for about 30 years. I'm confident that it will continue to do so.

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

Clearly.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor.

Thank you, Mr. Ste-Marie.

We are moving to the NDP, with Mr. Blaikie, for six minutes, please.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much, and thank you for your appearance here today. One of the things we've heard a lot of discussion about around this table since the election has been the role of quantitative easing in affecting prices in the housing market. There have been some around this table who have claimed that the quantitative easing program has been primarily responsible for the growth of prices in the housing market, or a further exceptional rate of increase, almost doubling over the last two years.

I'm very glad to have you here. I'm wondering if you would like to speak to the Bank's understanding of the role of quantitative easing in the housing market over the last two years, and the extent to which it may have contributed to increases in the price of housing overall.

[Tiff Macklem]

Yes, I'm very pleased to answer that question.

The reason we've seen strong mortgage growth in Canada is that Canadians want more housing, and there's limited supply. Banks are very happy to make loans to creditworthy Canadians. When people want more mortgages, banks make those loans.

There's no direct link between quantitative easing and the number of mortgage loans. What determines mortgage loans is how many houses people want to buy and what the costs of those houses are. Banks, as I said, are happy to provide the loans. They are subject to capital requirements, leverage requirements and liquidity requirements. Subject to those requirements, they can expand to provide those loans.

A number of witnesses have mentioned this to your committee. There are a number of reasons Canadians have wanted more houses during this pandemic. Probably the biggest reason is the obvious one, that we've all been spending a lot more time at home. Many of us have been working at home; our children have been studying at home; and recreation is at home. People have wanted more space. That has increased the demand for houses.

Monetary policy has also contributed to that increased demand in housing. Lowering our policy rate to the effective lower bound by using exceptional forward guidance, indicating to Canadians that they could expect interest rates to remain low for a considerable period, and supplementing that with quantitative easing all had the effect of lowering interest rates, including mortgage rates. When you lower mortgage rates, that encourages people to buy houses.

Our economy was in a huge hole. We needed that stimulus to get the Canadian economy out of that hole. It's worked. We ended QE last October. In January, we removed our exceptional forward guidance. Yesterday we raised the policy rate. It's time to get monetary policy back to a more normal setting. The economy has recovered.

Let me emphasize that there is no direct link between QE and mortgages.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Okay. I thank you for that.

Certainly, listening to some around this table at various times in the Parliament, you might have thought that quantitative easing was the reason we've seen such high increases in the cost of housing.

I want to talk to you about the other side of interest rates, which we don't often talk about. We spend a lot of time talking about the impact of interest rates on the cost of housing. We've had very low interest rates in Canada for a very long time now. The other side of the interest spectrum, of course, is retirement, and how low interest rates affect the retirement savings of Canadians, particularly those many Canadians who don't have company pensions. They rely on the CPP and their individual savings—and the performance of those savings—through either term deposits or investments in the market.

I'm wondering if you could you speak a little to the impact of low interest on people's retirement savings and what you think increases in the interest rate may mean for Canadians' retirement savings.

[Tiff Macklem]

We did an extended survey of Canadians leading up to the renewal of our inflation-control mandate. When we talk directly to Canadians, one of the things we hear from them—particularly from Canadians who are saving for retirement—is that very low interest rates make it hard for them to save.

One thing that was interesting when we surveyed Canadians was that Canadians care about themselves, but they also care about other Canadians. They weren't very enthusiastic about having negative interest rates, like those that have been implemented in other countries. They also don't like really high interest rates. Part of that reflects the notion that if you want to save, having higher interest rates makes that easier.

Overall, households' balance sheets have actually performed quite well through this pandemic. In fact, household savings are quite a bit higher. A lot of that has to do with people not being able to buy a lot of things. They haven't been able to travel. They haven't been able to go to restaurants. They've been buying more goods, but they haven't substituted one for one, so their savings have gone up.

The balance sheets of Canadians on average are actually in better shape. With interest rates higher, when they save, yes, they will get some more return on that.

Higher interest rates basically encourage less spending and more savings. That's how monetary policy works to moderate spending.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Blaikie. That is the time.

Members, we are moving into our second round. In this round, we are starting off with the Conservatives.

I have Mr. Fast for five minutes.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you, Mr. Chair.

Thank you, Governor, for meeting with us. I believe it's the first time I've had a chance to ask you questions.

I want to stay with quantitative easing and monetary policy.

The question that Mr. Blaikie put to you, which was on whether there was a link between quantitative easing and mortgage loans, to me, is perhaps the wrong question to ask. The question is, what is the connection between quantitative easing and inflation? To what extent did the Bank of Canada underwrite the government borrowing that happened during the pandemic period—in other words, the bond buying—and how much liquidity was actually injected into our economy as a result?

[Tiff Macklem]

I guess there are two parts to that question. If you want just some numbers, our quantitative easing program is about $300 billion on our balance sheet. That would be our purchases of government bonds in the secondary market.

I would stress a few things. First of all, the inflation we're experiencing today in Canada is not the result of too much demand in the economy. The economy is just getting back to its capacity. We were in a big hole. We've had a very impressive recovery. Now that the economy has recovered, that slack has been absorbed.

It is not causing inflation from domestic sources. One way to see that is that if you look at different parts of the price increases, goods price inflation, which is largely internationally traded goods, that's a 7.2% service price inflation, setting aside housing. The service component of housing is only 1.6% in Canada. That's what's more directly linked to demand pressures in Canada. That's not what's causing the inflation.

[Ed Fast, Conservative, Abbotsford, BC]

Governor, I didn't mean to suggest that quantitative easing in Canada was the sole source of inflationary pressures, or even the major part. There are a number of other things, for example, supply chain constraints and the spike in commodity prices, that are driving inflation. However, when you engage in QE, you are pumping liquidity into the economy. That's more dollars chasing the same number of goods.

I'm not suggesting that was the Bank's problem, but you did underwrite about $300 billion of Canadian government bonds, which the government then took and spent in the economy. Am I correct?

[Tiff Macklem]

To be clear, the government has to pay back those bonds.

[Ed Fast, Conservative, Abbotsford, BC]

I understand.

[Tiff Macklem]

We're not monetizing those bonds; we're buying them. They're on their balance sheet. The government has to pay them back. When those bonds mature, the government will have to pay them back.

[Ed Fast, Conservative, Abbotsford, BC]

I understand that.

When you underwrite those bonds, the government now has the capacity to spend the value of those bonds in the economy, and, in fact, it did. Is that correct?

[Tiff Macklem]

The government borrowed money in markets, which it has to pay back. We bought those bonds as a way.... Because our policy rate was at its effective lower bound, we couldn't lower our policy rate any more. A different way to lower interest rates is to buy government bonds, which pushes their price up and drops their interest rate. It's a different way to lower interest rates. It's not monetizing the debt. That did provide stimulus.

[Ed Fast, Conservative, Abbotsford, BC]

Yes, I understand it provided stimulus and that the stimulus was required. I'm not challenging you on that. I'm suggesting to you that when you engage in bond buying, the government has the capacity to spend that money and does, which in fact injects stimulus into the economy.

Let me go to another question.

You mentioned high household debt, and that concerns me as well. Our household debt to disposable income ratio today is around 180%, which is significantly higher than in the U.S. Has the Bank of Canada done calculations on the impact that higher interest rates will have on highly indebted consumers, those who are indebted on big mortgages, big credit cards and other consumer loans? Have you done that work?

[Tiff Macklem]

I'm going to take the opportunity to bring Senior Deputy Governor Rogers into the conversation.

Carolyn, why don't you take that question?

[Carolyn Rogers, Senior Deputy Governor, Bank of Canada]

Thanks, Mr. Fast. It's an important question.

Most certainly this is something the Bank spends time thinking about and it's part of how we look at the effect of our monetary policy decisions on the Canadian economy.

A back-of-the-napkin calculation on today's interest rate announcement, for example, would be about $12 on $100,000 of mortgage debt. There are lots of assumptions in that calculation: the term and the rate on the mortgage.

What's important to know about mortgages, though, is most mortgages, even variable rate mortgages, in Canada have fixed-rate payments, so there isn't an immediate change to payments. There is a change to the portion of the payment that's going to principal. It will take longer to pay down the mortgage. We acknowledge that. It's certainly a more indebted economy.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Rogers.

We're well over six minutes, but thank you for that.

We are moving to the Liberals, with Ms. Dzerowicz, for five minutes, please.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

I thank the governor and the deputy governor for being here today. Thank you so much for your important service to our nation.

I'll start off very quickly by correcting my Conservative colleague who started out the gate by indicating that the government continues to believe the economy needs more stimulus and investment. I want to put on the record what we have done as a government.

Since last summer we have been very deliberate about reducing the funding around our emergency programs, and it has been very targeted. What we wanted to try to do, as we're coming out of COVID, is reduce the amount of money we're giving, but not so quickly that it destabilizes the foundation of our economy, from which we want our businesses to continue to pivot and to rebound.

Governor, thank you. I appreciated your indicating to us that our fiscal policy was successful and that our generous emergency programs have worked both to stabilize the economy and to help it largely recover to where it is today.

My first question is actually about households. As you rightly pointed out, everybody is worried about the rising costs of, it seems, everything.

Have you done an analysis on how it's going to be impacting households in terms of interest rate increases?

[Tiff Macklem]

Households are in a wide diversity of situations. As Mr. Blaikie's question suggested, if you're getting close to retirement or are retired, you're looking at the interest return you can get on your savings. If you're younger and looking to buy your first house, of course you're going to be borrowing and you're going to be paying that interest. Among Canadians, there's a wide spectrum.

What I can say is that the balance sheets of Canadians on average are improved, actually, over the last year. There's about $200 billion of what economists call “excess savings” that households have built up, as I said, because they have been unable to buy a lot of the things they wanted to buy through the pandemic.

We're already seeing that, particularly through the fall as things reopened, they came back to restaurants and came back to recreation. Therefore, that savings rate is starting to come down, but there's still a stock of extra savings.

However, that's not every Canadian. Some Canadians have really stretched to buy that first house, and they are going to be more affected when interest rates go up. As I said earlier today, we recognize that higher interest rates are going to impact Canadians. We're going to be deliberate, we're going to be careful, we're going to be mindful as we do that, and we're going to assess the impacts along the way. The economy is strong and we certainly think it can handle higher interest rates. We think it needs higher interest rates, but being on a rising path doesn't mean we're on autopilot.