Evidence of meeting #24 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.
4:20 p.m.
Liberal
Julie Dzerowicz Liberal Davenport, ON
As you rightly noted, we're very much engaged in Ukraine and the Russian aggression into Ukraine. Can we do both, spend on supporting Ukraine and tackle inflation at the same time?
4:20 p.m.
Governor, Bank of Canada
Again, spending decisions are really decisions for governments.
Spending on Ukraine.... I guess it depends what you're spending the money on, but if you're sending them aid, that's not really going to create inflation in Canada. It would create a bigger deficit, but it's not spending in Canada; it's spending in Ukraine.
4:20 p.m.
Liberal
Julie Dzerowicz Liberal Davenport, ON
I know that the Bank is very much going to be working on reducing inflation. Are there any external factors that will also help support reducing inflation?
Perhaps there businesses that help to tackle the supply chain issue, or maybe there are some other things that might be helping to put a downward pressure on inflation, beyond the work that the Bank of Canada is going to be doing.
4:20 p.m.
Governor, Bank of Canada
I'm going to ask our senior deputy governor, Ms. Rogers, to lead off on this one.
4:20 p.m.
Senior Deputy Governor, Bank of Canada
One of the most important things that will help with inflation is an improvement in productivity. Lots of businesses have been affected by the pandemic. Their productivity has been affected by the pandemic. You see it when you walk into a grocery store or a restaurant. We've got extra staff checking vaccine passports, or providing support in cleaning, queuing or that sort of thing.
As the pandemic lifts and as the economy continues to recover, we expect productivity will pick up again. When productivity picks up, the economy can take more demand without the price pressure. Certainly, productivity will give it a lift. It will help us in the fight against inflation.
4:25 p.m.
Liberal
The Chair Liberal Peter Fonseca
Governor, that was the time, but I'm sure you're going to have an opportunity in another round.
We are moving to the Bloc, with Monsieur Ste-Marie for two and a half minutes.
4:25 p.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you, Mr. Chair.
Mr. Macklem and Ms. Rogers, I want to know why you chose not to raise the policy interest rate in January. In particular, I want to know how the following factors may have influenced your decision. First, the fact that the economy hadn't returned to a high enough level, according to your criteria; second, the commitment not to raise rates for a certain amount of time, or until the economy returns to its full potential; and third, the alignment of your monetary policy with the American Federal Reserve's policy.
4:25 p.m.
Governor, Bank of Canada
First, the purpose of our currency, the Canadian dollar, is to ensure that our monetary policy is independent from the policies of other countries. Yes, we take into account the situation in the United States. However, we make our decisions here in Canada for Canadians.
Why did we make this decision in January? At that point, our economic capacity had recovered. We no longer needed to tell everyone in our forward guidance that we would keep the interest rate at the effective lower bound. We decided to end that commitment. We sent a very clear message to Canadians that they could anticipate an increase in interest rates. This was a fairly major change in direction for the monetary policy. We wanted to make sure that this choice was well thought out, that we were transparent and that the information was shared with Canadians. Yesterday, we implemented the first step in that interest rate increase.
4:25 p.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
We can now expect a series of gradual increases in the policy interest rate over the next few quarters. Is that right?
4:25 p.m.
Governor, Bank of Canada
You can expect interest rates to keep increasing. Raising interest rates should normalize the monetary policy, because our economy has returned to a more normal pace.
4:25 p.m.
Liberal
The Chair Liberal Peter Fonseca
Thank you, Mr. Ste‑Marie.
We are moving to the NDP and Mr. Blaikie for two and a half minutes.
4:25 p.m.
NDP
Daniel Blaikie NDP Elmwood—Transcona, MB
I think one of the challenges right now for a lot of folks is trying to square things that we hear, like the numbers you cited earlier about household savings being up, with the pressure that so many Canadians are very clearly facing in terms of pricing.
There was a poll out earlier this week that says over half of Canadian households are worried that they can't keep up. We know that before the pandemic somewhere in the neighbourhood of half of Canadian households were about $200 a month away from insolvency.
It's trying to square some of the different messages that we're hearing, and it seems to me that in part the answer lies in this other component that's a lot less talked about, unfortunately. The Parliamentary Budget Officer put out a report in December, or thereabouts, saying that 40% of Canadians right now are sharing 1% of the wealth that's generated in Canada, and 1% of Canadians own or control 25% of the wealth.
When we talk about average household savings being up, that can be a positive thing overall, on a macroeconomic level, but those averages can really hide some disparities, depending on where people fall in terms of their revenue category and their socio-economic status.
I'm wondering if you might explain to us how the Bank analyzes that component of the problem. Also, when we talk about optimism because of average household savings, to what extent is that skewed by some households having proportionately much larger savings and so many others still living paycheque to paycheque?
4:30 p.m.
Governor, Bank of Canada
It's a big question, so let me offer a couple of things.
First of all, the monetary policy is, by its very nature, a very macro tool. We have one rate of inflation for the whole country, the CPI inflation. That is our target. We have one interest rate for the whole country. That's our instrument, and we obviously can't target specific groups.
One of the big costs of inflation is that it does hurt low-income, poorer people the most. When grocery and gas prices go up, it bites for them the most, and that's one important reason that you want to keep inflation low and stable.
This pandemic has been a very good example. You can't understand the macroeconomy without looking at a more granular level, at the experience of different Canadians in different sectors of men, women, youth, and of racialized Canadians. You need to look at the different experiences to get an understanding of that macro picture.
Probably the most important thing you can do to create more equality in this country is to get everybody back to work. If you look at the effects of this pandemic, you see that it wasn't just that three million people were out of work—an unbelievably huge number—but it was also how incredibly uneven it was. It was very concentrated on youth, low-income workers and women. As the economy has recovered, the good news is that those inequalities have dramatically diminished. In fact, youth and female employment is now above prepandemic levels; low-wage workers have come a long way back, but there's still some room there.
4:30 p.m.
Liberal
The Chair Liberal Peter Fonseca
Thank you, Governor, and thank you, Mr. Blaikie.
We are moving to the Conservatives. We have MP Albas.
4:30 p.m.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
Thank you, Mr. Chair.
Thank you, Governor, and thank you, Deputy Senior Governor, for your presence here today.
Governor, before we go any further, you mentioned to MP Blaikie that there was no relationship between QE and mortgage prices. I was always under the impression that bond prices and mortgage interest rates have an inverse relationship. Maybe I heard that wrong. Could you clarify your remark?
4:30 p.m.
Governor, Bank of Canada
I'm happy to.
When you engage in QE, you're buying government bonds. That pushes their prices up, which lowers the yield on those bonds, and yes, as you suggested, if you lower the.... Government bonds are the benchmark that everything else is priced on, and as I responded in my earlier answer, QE contributed, along with the other monetary measures we took, to lower mortgage rates, which did support the housing market.
When I said there was no direct...what I meant was there's no quantitative.... Banks don't need our settlement balances to make mortgage loans. When we move to quantitative tightening, I can assure you that banks will still be making mortgage loans.
4:30 p.m.
Conservative
4:30 p.m.
Governor, Bank of Canada
The prices will change, but it's not a quantity link.
4:30 p.m.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
You said earlier that we may have the opportunity to explore housing further, and I certainly want to do that here, but in regard to that, we have a 43% increase in the average home price in two years. Now, I want to ask you specifically on that how you get that kind of increase, especially given the amount of quantitative easing that the Bank of Canada has undertaken over the past two years.
Could you maybe explain how that is? It sounds to me that, for whatever reason.... Look, I'm not looking backward. I'm looking forward. I'm trying to get an understanding of how you can have a 43% increase in just a two-year period.
4:30 p.m.
Governor, Bank of Canada
Housing prices have gone up a lot. The housing market is very elevated and we cannot continue to see the kinds of increases in housing prices or the kind of growth rate we've seen in housing. I just want to be very clear on that right off the top.
Why have housing prices gone up so much? It's a combination of the fact that there's been a lot of demand for housing and there's been limited supply. I know that a number of witnesses before the committee have talked quite a bit about supply—CMHC as well as others. The fundamental solution to reducing house price increases is to increase the supply of housing in this country. That's what's actually going to get people into the houses they want.
I am pleased to see that across different levels of government there is more focus on supply. This issue of high housing prices and elevated household indebtedness as people stretch to buy those houses has been going on for the last seven or eight years. This predates the pandemic. The pandemic has, like it has for so many things, intensified it.
4:35 p.m.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
Governor, with all due respect, I'm asking about the last two years. Has quantitative easing affected interest rates and added fuel to the fire when it comes to our housing costs?
4:35 p.m.
Governor, Bank of Canada
Quantitative easing, together with the other measures we took, lowered mortgage rates, and that contributed to the strength of the housing market.
4:35 p.m.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
Okay.
Again, some people might say that 43% is pushing home ownership, the goal and dream of many Canadians, away even farther.
Your predecessor mentioned once at committee that he'd like to see more different offerings of different types of mortgages. He said that we didn't have a variety of different mortgages that could meet different needs. Would you happen to agree with that? Should there be more innovation in the mortgage space than what we have today?