Finance Committee on March 3rd, 2022

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

Thank you.

One of the questions I wanted to touch on is that there was a lot of discussion around the time that the mandate was being renewed on the question of full employment being one of the objectives within the mandate of the Bank of Canada. Of course, a decision was taken not to include that in the mandate of the Bank.

I wondered if you could take some time to speak to that decision and the big question mark that's out there for over 6% of Canadians for whom, despite a lot of talk in the economy of employers who need employees, there is nevertheless a stubbornly high unemployment rate.

Why was there a decision not to include that in the Bank of Canada's mandate, even though it's clearly something that it seems the Bank will be paying close attention to? What do you think the path out of that stubbornly high unemployment rate is, and how can monetary policy help in trying to bring that number down?

I thought of this in your reply to my last question. You said that the best way to fight inequality in Canada is to get everyone back to work, but of course there's the decision to say that that's not part of the mandate of the Bank of Canada. I'm hoping you can help us understand that decision a little better.

[Tiff Macklem]

It's a lot for six minutes, but let me try to go at it quickly.

I'm very pleased with the renewed mandate of the Bank of Canada. The renewal in some sense really reflects the success we've had over the last 30 years. It also clarifies the role of employment in our framework. I would stress that the economy has to be at full employment to keep inflation at target. If we're below full employment, the economy is missing jobs. It's missing wages. That means it's missing spending. That means inflation is going to be below the target.

One of the things I like about the new agreement is that it is clearer about that. It is clearer that we have a role to play, consistent with achieving price stability, in supporting employment. It's clear that our primary objective is price stability.

Also, as part of the agreement, we indicate that we will be providing more analysis of labour markets. We've already started that. If you look at our last monetary policy report, actually, you'll see an extensive discussion of a very wide range of labour market indicators. We are using those—not just the aggregate ones but also the inclusiveness of the labour market and the characteristics of jobs, such as the hours worked and the wages—as a way to come to that overall assessment of how much slack is in the economy.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor. You encapsulated all of that into a minute and a half. That was great. Thank you.

Thank you, Mr. Blaikie.

We're moving to the Conservatives.

Mr. Chambers, you're up for five minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

Thank you, Governor. I'd like to take you back to what you mentioned a couple of times—namely, the very unconventional time in which we found ourselves in 2020 and some of the tools we had never used before. We kind of brought them to bear on the market to make sure that interest rates...and that the market was continuing to function. That, of course, was the QE you've spoken about.

At some point, the QE became more of a regular policy tool that we used on an ongoing basis versus that really immediate short-term need we had when everything started. You also mentioned, when we last spoke, the Bank's making its policy choices based on some of the decisions made by the federal government's Department of Finance.

The question is this. We know that QE has helped keep interest rates low. The flip side is that had we not done it, had we not purchased government bonds, then interest rates would have gone up. I'm curious as to whether the Bank really had a choice whether it would do QE or not later in the pandemic, when it was presented with fiscal plans from the government that we knew would spend $100 billion, $200 billion, $350 billion.

[Tiff Macklem]

Well, the Bank certainly has a choice. We use our tools to achieve our inflation target. The reason we threw a lot at this problem at the beginning was that we were in the biggest, sharpest recession we've been in for many, many generations, so we threw a lot at it.

The other thing I would stress is that our primary instrument is interest rates. The reason we resorted to forward guidance and QE was that we'd lowered the rate as low as it could go. We've now increased the rate. We ended QE last October. We've now increased our policy rate. We are considering quantitative tightening. Our policy rate will remain the principal instrument.

[Adam Chambers, Conservative, Simcoe North, ON]

That's fair. Thank you. It's just that when you're presented with the fiscal plan of a government, and we want to keep interest rates low, in my view it didn't leave the Bank much opportunity to change away from its course.

Let's move on to talking about low-income Canadians. You gave a speech a year ago, and you mentioned it here again today, to the effect that inflation has such a significant effect on low-income Canadians, those individuals who are cash-strapped, if you will, or living month to month, paycheque to paycheque. Our decision, the government's decision, the Bank's decision, to continue the lower interest rate policy for longer and longer still has had a significant effect on these individuals.

How would you recharacterize what you said just a year ago?

[Tiff Macklem]

I remain concerned that inflation has a disproportionate effect on lower-income Canadians. That is one of the reasons it's so important to maintain low, stable inflation. The people who suffer the most are the least able to afford it.

The inflation we're seeing today—as we've gone over a number of times—is largely driven by increases in globally traded prices. It is critically important that we move interest rates up to keep inflation expectations well anchored and moderate spending to get inflation back to target.

It will take some time to get there. Our tools do take some time, but I am confident we'll get there.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you. I appreciate that. Hopefully we will continue on this path to getting inflation under control.

I have a final question.

We talk a lot about inflation expectations and anchoring, and I know that's something you think a lot about. In October, there were two risks that you put forward to the outlook of the economy, and they were inflation expectations and wage expectations.

The bank's own research in January indicated that businesses, for the first time in a really long time, believe that wages will be higher 12 months from now, and for the first time in a long time are the highest ever recorded. They expect prices to be well outside and above the inflation target range.

Are you concerned that this inflation expectation is now taking hold in the economy?

[Tiff Macklem]

I'm glad you're looking at our surveys very carefully.

Yes. As I highlighted today, and as we highlighted in our press release yesterday, we are concerned that the longer inflation stays well above our target, the bigger the risk is that inflation expectations start to drift up.

The other thing we're concerned about, which I talked about at some length today, is that inflation is high. It's also broadening. If you look at the various components—there are 165 components of the CPI—almost two-thirds of them are now rising above three per cent. What that means is that even if you're a very careful, diligent shopper and you look for the best deals, it's hard to avoid the inflation that we're experiencing today. That raises the risk that people start to think that these high price increases are going to continue. If that happens, the risk is that inflation expectations become unmoored and it gets a lot harder to get inflation back to target.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor, and thank you, Mr. Chambers. That's the time.

We are moving to the Liberals and Ms. Chatel.

You have five minutes, please.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you, Chair.

I'd like to start by bringing in some inconsistencies that I see with the Conservatives' economic policy. On one hand, it seems that they think the government spending we did to protect our economy has created inflation, and at the same time, they're particularly concerned about inflation in housing.

Governor, as you said very well today, it's not about spending, it's what you spend on. If you spend to increase the supply of housing, for example, you actually reduce the inflationary pressure on housing.

I hope they will reflect and focus on that: What you spend on is really the key to increasing the supply in some pressure points.

In general, my concern right now is really climate change. As we know, and as you said, climate change will lead to droughts. This will put pressure on agriculture, increase food prices and cause supply chain disruptions.

Governments are certainly using their current tools to make a green shift. One of the best tools to help our economy transition to a green economy is to set a price on pollution. The OECD economists are sure of this.

How do you see climate change affecting inflation in the food sector? Food is a commodity for low‑income Canadians. It's very important.

[Tiff Macklem]

We're starting to work on the impact of climate change in terms of monetary policy. Right now, it isn't really part of our monetary policy models. However, we're starting to look at this issue.

We conducted a study with the Office of the Superintendent of Financial Institutions and six major financial institutions in Canada, using a scenario analysis. It's very difficult to make predictions about climate change given the level of uncertainty. We looked at different scenarios and tried to determine the impact of each one, in order to help financial institutions manage the risks posed by climate change to their balance sheet. When these risks are better understood, the financial system is in a better position to allocate capital to more sustainable investments.

That said, it isn't our role to provide advice on climate change policy. It's really up to Canada's elected officials to determine those policies. However, we play a role in helping the financial markets manage these challenges.

We must work to better understand the impact of climate change on our monetary policy models.

[Sophie Chatel, Liberal, Pontiac, QC]

Certainly, climate change is going to create inflation in terms of agricultural products. In fact, we are already seeing it.

[Tiff Macklem]

Yes. Last year, droughts and major storms affected crops. This is partly related to climate change. There were also droughts before climate change started. So we need science to separate the two phenomena.

That said, climate change is certainly having an effect on crops, as we've seen with droughts in western Canada.

[The Chair, Liberal, Peter Fonseca]

Ms. Chatel, that actually concludes our third round.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Members, we are going into our final round. As we do on this committee, if there is not enough time for a full round, we divvy up the time among all the parties. I'm looking at about four and a half minutes for each party. We will start with the Conservatives, for four and a half minutes.

Mr. Fast, you have the floor.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you.

Governor, much of your analysis has focused on the supply side challenges that are driving inflation, such as supply chain constraints. You suggested that is the major driver, and I'm inclined to agree with you on that. However, there are some who are expressing concerns about the demand side.

For example, the chief economist from TD Bank recently said, “Demand driven by the rebounding economy and stronger household buying power will offset much of the relief on the supply side.”

Do you agree with her, or is there a risk on the demand side that we're going to see, effectively, a two-pronged pressure on inflation in Canada?

[Tiff Macklem]

I haven't actually read that publication from TD, but yes, what I've been saying is that the economy has recovered. Slack has been absorbed. There is solid momentum in demand. We had a very strong second half of last year. We're coming out of omicron and we're expecting to see continued strength.

That does mean there is a risk that demand starts to run significantly ahead of supply; if that happens, we will have a new domestic source of inflation. That really comes back to why we've started to raise interest rates and signalled that we expect that we will need to continue to raise interest rates, so that we can moderate that spending growth and keep demand and supply roughly in balance.

[Ed Fast, Conservative, Abbotsford, BC]

Governor, is there any justification for further stimulus being injected into the economy, either through QE or through government spending?

[Tiff Macklem]

Well, we don't need QE anymore. We ended QE last October. In fact, we're now considering QT—

[Ed Fast, Conservative, Abbotsford, BC]

What about on the government spending side?

[Tiff Macklem]

Look, I'm going to leave decisions on government spending to our members of Parliament.

[Ed Fast, Conservative, Abbotsford, BC]

All right.

Let me ask you about Mr. David Rosenberg, someone you would be familiar with. He has suggested that by the end of 2022, this year, we will be looking at a recession rather than talking a lot about inflation.

Do you agree with him? If not, why not? Are there steps that you are taking to ensure we don't slip into a recession?

[Tiff Macklem]

Our forecast doesn't have anything that looks like a recession. Our forecast has really quite solid growth for this year and next year. It is moderating, but it is solid.

Look, we think interest rates need to go up to moderate growth. We think the economy can handle that. We think the economy needs that to bring inflation back to target, but we think we can grow this economy and bring inflation back to target.