Finance Committee on March 3rd, 2022

[Ed Fast, Conservative, Abbotsford, BC]

I want to go back to the testimony you gave on liquidity and quantitative easing, and its relationship to inflation.

Is it your testimony that in fact liquidity in the marketplace does not drive inflation?

[Tiff Macklem]

Just to be clear, what I was saying was that there's no direct quantitative effect between the size of settlement balances and the number of mortgages that are written in this economy. Banks don't need settlement balances or QE to write mortgages, and when we go to QT and we're reducing the size of our balance sheet, banks will continue to write mortgages.

That said, lowering interest rates, using forward guidance, supplementing that and reinforcing that with QE, all worked to lower interest rates and lower mortgage rates, and that definitely has contributed to the strength we've seen in the housing market. Our economy needed that stimulus. The economy has now recovered, and we're now on a path to normalizing monetary policy.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor, and thank you, Mr. Fast.

We are moving to the Liberals and Ms. Dzerowicz for four and a half minutes.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

I want to thank the governor and the deputy governor for being so great, for continuing to be with us and for being part of this really excellent conversation.

Governor, my colleague talked a bit about your academic background. One of the things I always remember very clearly is that you were part of writing a seminal report around sustainable finance that I have always read and have thought excellent.

I believe you know that we as a federal government have a very aggressive agenda to decarbonize and to move to net zero by 2050. We have committed about $100 billion in spending in over 100 different things we're planning on doing. Given the concerns around inflation, do you think we should be slowing down?

[Tiff Macklem]

Again, I'm really going to leave these decisions for our elected members of Parliament to take. These are spending decisions, taxation decisions. Those are decisions the government—

[Julie Dzerowicz, Liberal, Davenport, ON]

I expected you might say that, Governor, but I do want to thank you for your excellent work around sustainable finance.

I will go back to productivity, then. Last time I was asking about this, we ended the conversation around productivity, and I think you were about to say something. I don't know if you recall that. If not, I will go on to a continuing question I have around productivity.

[Tiff Macklem]

I think what I was going to say is that a key part of productivity is for businesses to invest—invest in workers, invest in new capital—because when you give workers better tools, they are more productive, and higher productivity pays for higher wages. If wages go up because productivity went up, that is not inflationary.

One of the things I was pleased to see in the fourth quarter data was that actually we are starting to see that rebound in investment. When we talk to firms, their investment intentions have never been stronger, and we very much hope that companies follow through on those business plans and make those investments.

[Julie Dzerowicz, Liberal, Davenport, ON]

One of the things we've heard on this committee through the years is that one of the best ways for us to improve productivity at a very low cost is by continuing to work on eliminating the different regulations between the provinces and the trade barriers between the provinces. Would you agree that this needs to be a continued focus and that it would greatly increase our productivity?

[Tiff Macklem]

I think that would be a very good idea. There are a number of things governments at all levels could do that wouldn't cost them any money and that would get this economy working better. It's partly productivity; it's partly that it would help workers. Workers could move between provinces and get jobs that were better suited to them. Yes, there are a number of regulations that have probably outgrown their usefulness, and it would be a good idea to look at those.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you, Governor. I'll say to you that you're good luck, just because from the opposite bench I'm hearing my colleagues say they very much support that as well, so I'm hoping we might undertake that as an urgent study. I think that, particularly as the world becomes more unpredictable and unstable, strengthening our internal economy and our Canadian economy will be beneficial for all Canadians and Canadian businesses.

Do I have time for one more quick question?

[The Chair, Liberal, Peter Fonseca]

Thirty seconds, yes, really quickly.

[Julie Dzerowicz, Liberal, Davenport, ON]

Governor, this morning you noted that you expect inflation to come down in the second half of this year, as we see the challenges of the pandemic ease. Can you elaborate on this, please?

[Tiff Macklem]

Yes. As I've discussed, much of the inflation we're seeing is related to this combination of a big shift away from services into goods, because people couldn't buy a lot of the services during the pandemic, combined with supply bottlenecks and impaired global supply chains. As the pandemic eases, we expect that people will go back to buying all these services they want. They're going to start to travel; they're going to go to restaurants; they're going to go to a rock concert. They're going to spend more on services and less on goods. That will take some pressure off these global supply chains. At the same time, we're seeing a lot of investments to try to improve these logistics and strengthen the supply chains. Those things should ease and inflation should come down, but it will take some time.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor. Thank you, Ms. Dzerowicz.

We are moving to the Bloc and Mr. Ste-Marie for four and a half minutes.

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

Thank you, Mr. Chair.

Governor, I'm going to do the same exercise again, but taking the words of another economist. I will quote Mohamed El-Erian, an economist who is not at all of the same school of thought as Joseph Stiglitz. In his February 28 article, he is very critical of the management of inflation by the U.S. Federal Reserve, otherwise known as the Fed.

Towards the end of his article, he states:

[...] Fed officials have offered different views publicly regarding how the central bank should approach both interest-rate hikes and reducing its bloated $9-trillion balance sheet.

Lacking any proper guidance from the Fed, the market rushed to price seven or eight rate hikes in 2022 alone. Some Wall Street analysts went as far as ten, including a 50-basis-point hike as soon as the Fed’s mid-March meeting. Others urged the Fed to implement an emergency intra-meeting rate increase.

I would like to hear your comments on what Mr. Mohamed El-Erian has written.

[Tiff Macklem]

I'm not sure I understood the question very well.

People can have different perspectives on what the U.S. Federal Reserve should do.

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

First, Mr. El-Erian criticizes the Federal Reserve for not properly considering the importance of inflation. Furthermore, in the first part of the excerpt I read, he states that “Fed officials have offered different views publicly regarding how the central bank should approach [...] interest-rate hikes [...].”

Do you have a reaction to this? Do you agree with what the economist Mr. El-Erian wrote?

[Tiff Macklem]

Federal Reserve Chair Powell made statements yesterday and today about the situation in the United States. I will leave it to the U.S. Federal Reserve to talk about its monetary policy. Personally, I have enough challenges here in Canada. So I'm going to focus on inflation here in Canada.

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

Indeed, but I think there is a certain interpenetration or an interconnectedness between what is done at the U.S. Federal Reserve and the decisions you make.

Economist El-Erian writes that there could be seven, eight, or even as many as ten interest rate hikes by the U.S. Federal Reserve during 2022. Is this a statement that surprises you? Would you, again, prefer not to comment on these statements?

[Tiff Macklem]

I prefer to focus on our challenges here in Canada. I'm more than willing to comment on Canadian monetary policy, but not that of other countries.

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

All right.

In your opinion, is it conceivable that there could be seven or eight interest rate hikes in Canada during 2022?

[Tiff Macklem]

As I mentioned today, we anticipate that it will be necessary to raise interest rates further. We have to make a decision eight times during the year. On each of these occasions, we consider what we should do to bring inflation back towards our target. If the upside risks are greater, we may have to move more quickly with tighter measures. In these circumstances, we will raise interest rates more quickly. However, it is possible that after a few interest rate hikes, the effect of our monetary policy will be stronger than expected, so we might decide to take a little break from that. Time will tell. We will make these decisions in stages.

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

That is very clear. Thank you.

I have one last question for you. It's a very short one.

Have you changed your inflation forecasting models, given what we have seen over the last year? If so, what were those changes?

Thank you, Mr. Macklem.

[Tiff Macklem]

We're always trying to improve our models, but we haven't really made any big changes to them.

In fact, we've started using all sorts of new data. As I mentioned earlier, we look at a wide range of labour market data. More recently, we're looking more and more at data around supply chains and bottlenecks and so on. During the pandemic, we used all sorts of new data to look at, for example, the mobility of people.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Macklem.

Thank you, Mr. Ste-Marie.

We are moving to the NDP. Mr. Blaikie, you'll be the last questioner.