Finance Committee on April 25th, 2022

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Dzerowicz.

Now we'll move to the Bloc with Madame Sinclair-Desgagné.

[Nathalie Sinclair-Desgagné, Bloc, Terrebonne, QC]

Thank you, Mr. Chair. It's nice to see you.

Thank you for being here, Mr. Macklem and Ms. Rogers.

I quite appreciated your opening statement. You painted a clear picture of the current challenges and causes of inflation, among other things. You mentioned supply chain issues, which we've heard a lot about, as well as other domestic and international determinants.

The last time you were here, on March 3, you said that the inflation we were seeing was caused by a series of international factors mainly, and less so by excess demand domestically. Would you say that has changed?

[Tiff Macklem]

Generally speaking, that hasn't changed much. The main factors behind the inflation we are seeing here, in Canada, are international, including, as I mentioned, higher oil prices and supply chain disruptions. However, with the strong recovery, the economy has moved into excess demand. Demand is outpacing supply, and that is clearly being felt domestically in markets such as housing. Those pressures are at work here, in Canada.

International factors play a more important role, but with the economy now in excess demand, moderating spending growth is necessary to rebalance supply and demand and return inflation to target.

[Nathalie Sinclair-Desgagné, Bloc, Terrebonne, QC]

Thank you.

Continuing along the same line of questioning, I want to talk about the situation since March 3. The government tabled its budget just over two weeks ago, and I believe you indicated in the report that the budget would have a positive, but modest, impact on the Bank of Canada's efforts. How much of an impact will the measures in the budget have?

[Tiff Macklem]

The report we released a week and a half ago does not reflect the measures in the federal government's most recent budget because the tabling was too close to our publication date.

As I mentioned during the press conference, the impact will be positive. You are correct. The measures represent approximately $30 billion over the next five years. While that is positive, it will not really have an impact on our macroeconomic predictions. Those measures will be taken into account in our next set of predictions, which will be published in July. The budget measures may have an impact on some aspects, but they will not affect our macroeconomic predictions.

[Nathalie Sinclair-Desgagné, Bloc, Terrebonne, QC]

Thank you.

If I understand correctly, then, your last report does not necessarily examine the budget measures.

As you said, we are still in the midst of the pandemic. Again this morning, I received telephone calls from people and business owners in the tourism, hospitality and event sectors. They really need help because the clientele has not returned.

This is an industry that is very much in trouble. On one hand, sectors are having problems because of supply chain issues, and on the other, the economy is in excess demand.

Where does the Bank of Canada stand on the fact that it now has an arbitral role, having to balance moderating inflation and stimulating the economy, as you said?

[Tiff Macklem]

The pandemic impacted a number of sectors very unevenly, and thanks to the strong recovery, that unevenness has significantly smoothed out. That's a very positive effect of this strong recovery.

The economy has fully recovered from the pandemic, now moving into excess demand. That doesn't mean that every single sector has recovered from the pandemic. Some sectors are indeed still being affected, in particular the tourism sector, but the other sectors have more than made up for that.

Our mandate revolves around inflation, so it's very macroeconomic. We have to look at the economy as a whole, and it has just entered a period of excess demand.

[Nathalie Sinclair-Desgagné, Bloc, Terrebonne, QC]

I see.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Sinclair‑Desgagné.

We are now moving to the NDP and MP Blaikie for six minutes.

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

Thank you very much.

Thank you, Governor Macklem and Deputy Governor Rogers, for joining us here today.

We were talking about this a little bit earlier, wage growth being considered a factor in inflation. We talk about price increases. I looked at the report that you put out not that long ago, where profit growth factors into the analysis of the Bank of Canada.

There have been several studies out in the last four weeks or so that indicate a very extraordinary rate of profit growth in Canada's corporate sector among a number of different industries showing a much higher rate of profit-making compared to 2019 before the pandemic. I think David Macdonald at the Canadian Centre for Policy Alternatives has estimated that those increased corporate profits might be responsible for up to about one quarter of inflation in the Canadian context at the moment.

Not having seen a discussion of corporate profit in your report, I'm wondering if you're tracking that, where it fits in the framework, and what reflections you might have for the committee today on the role of price increases that go beyond increases in costs to companies that are delivering goods and services in the Canadian economy.

[Tiff Macklem]

I'll make a few comments here.

First of all, the economy is strong. That means, yes, when the economy is strong, companies tend to do well, profits are healthy and wages go up.

We do look at how income gets divided between labour and business. Clearly you want shared prosperity. The other thing I would say is that—and this gets to price increases—for a long period before the pandemic.... We regularly go and talk to businesses. We survey them. We have a quarterly business survey, and one of the questions we ask them, when they get increases in their input costs, is if they are passing those on to their customers.

Typically what they tell us is that, yes, there's going to be some pass-through, but competition is really tough, our customers are very price sensitive, and it's very hard to pass those through, so there's very little pass-through.

Currently, against a background of an economy that's moving into excess demand, against a background of an economy where prices are increasing overall, what we're hearing is companies telling us that they're passing through price increases more quickly to consumers.

The best way to deal with that is really to get inflation down, to re-establish price stability.

One of the benefits of low, stable inflation is that then price increases stand out and consumers react and businesses are sensitive to that. That's one important reason why we need to get inflation back down, and that's why we're raising interest rates.

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

When we hear that corporate profit margins averaged 9% in 2019, and now are averaging 16% in 2021, that seems like more than passing on rising costs to consumers. The profit margin wouldn't be increasing at such a high rate if it really was just a case of passing on costs, as those costs would eat up the additional revenue if there was a one-to-one ratio of increased costs to increased price. Clearly, with an almost 50% increase in profit margins over the last two years, those price increases are more than passing on increased costs to consumers, there's quite a bit more happening in there. Of course, if you break it down by industry, there are going to be differences, but there are several industries where there's a pretty strong profit growth by significant amounts that would seem to dwarf whatever their increase in costs are, or presumably, there would be no increase in profit if consumers were just paying the additional costs of the company in delivering the good or service.

[Tiff Macklem]

As I said when I began, the economy is strong. Businesses see strong demand for their products, which gives them pricing power. Profits are normally quite procyclical, and we're in excess demand. We need to moderate spending, we need to bring demand and supply in line, and that's the best way to re-equilibrate the situation.

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

Where significant price increases or significantly larger profits are behind price increases, and it's not just a case of passing on costs, those price increases are part of the inflation story, are they not? If companies are taking an opportunity in the market of reduced competition, because of interference with global supply chains or whatever the reason may be that they have more pricing power in this current market, and part of that is just elevated demand, particularly for goods, because people haven't been able to spend on services to the same extent.... In that context, if companies see an opportunity to increase their profits, they will also be increasing inflation.

I would say it's not really part of the narrative that's been told about inflation. But if those exceptional price increases and profit growth are responsible for up to 25% of the inflationary package that Canadians are experiencing in their current budget, while I respect that that's not something you can deal with from a monetary policy perspective, ought it not to be an important part of the narrative so when government is looking at its fiscal policy and other measures, they're sensitive to the fact that that may be going on and feel an obligation to take action?

[Tiff Macklem]

Let me be clear, my message to companies is that they should not expect current rates of inflation to continue, that shouldn't be reflected in their pricing decisions. We've been very clear we are raising interest rates, we need to raise interest rates to slow spending and bring inflation back, and that's what companies should be expecting as they take their pricing decisions moving forward.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Blaikie, that's the time.

We're moving into our second round, members.

In this round, we have the Conservatives up first.

MP Chambers, you have five minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

Thank you, Governor, it's nice to see you. Deputy Governor, welcome.

I hope we've perhaps set a precedent that until our inflation gets back into the control range, we'll see you regularly at this committee, but we'll leave that scheduling for later.

I think the central bank governors have one of the toughest jobs these days. I appreciate that in your responses to my colleague you mentioned that you've gotten some things right, and you've gotten some things wrong. That's a refreshing statement. I think we'd all be better served perhaps if members of the executive branch had the same level of humility.

I want to take you back to the fall of 2008 when central banks coordinated a 50-basis-point decrease as a response to the financial crisis at the time, I believe that was an off-cycle rate for a number of the countries that participated. It was reported that last week in the IMF meetings you had said it's on the table to do something more than 50 basis points. I'd like to give you the opportunity to expand a bit on that comment. Is more on the table and is there some coordination amongst central banks on the upside, if they could coordinate on the downside?

[Tiff Macklem]

I'll start with the second part.

Central banks around the world were looking at very similar things. The reality is that different parts of the world are coming out of this pandemic at different speeds, so while I think the direction of travel is pretty similar across central banks—or at least most central banks—the speed and the pacing and the size are going to depend on the situation in that country. Actually, that is the big advantage of having your own currency, your own monetary policy. It's that you can direct your monetary policy to the situation in your country.

On the first question regarding my comments, I guess I'd highlight a few things. A week and a half ago, we raised our policy rate by 50 basis points. That is unusual. Our typical step is 25 basis points. We also began quantitative tightening. Together, this was quite significant, and we signalled to Canadians that they should expect further increases in interest rates. We said that we needed to normalize monetary policy reasonably quickly.

As we get to our next decision, the typical step would be the 25 basis points. As I said earlier, I expect we will be considering a 50-basis-point increase. I'm not going to rule out other options, but anything bigger than 50 basis points would be very unusual.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

I have about a minute and a half and I have two questions, so I'll need to be brief.

On raising rates to control inflation, are you comfortable—or is the bank comfortable—with risking a recession to do that?

[Tiff Macklem]

As I said earlier, we think the economy can grow solidly and bring inflation back to target. I won't pretend it isn't delicate, but with an economy that's in excess demand and a labour market that's got very high levels of vacancies, if we can get this right, we can reduce those vacancies, keep strong employment and get inflation back to target. That's our aim.

Are there some risks? Yes, there are some risks. The only thing I would say is that we take each decision at a time. We're going to be watching the effects of higher interest rates and how they bite on the economy. We'll be watching how that's affecting inflation, and we'll calibrate our decisions for what the economy needs to achieve our mandate.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you. That's very helpful. We'll maybe pick this up in the next round.

You now have a slightly modified mandate, which includes reference to employment, but I notice that the bank doesn't project employment levels. That's interesting to me also because of the private sector economists who are projecting employment levels and are projecting unemployment to remain at a very low level and inflation to come down at the same time. I don't think in the last 50 years that has ever happened in any advanced economy.

Are you concerned, are you projecting employment internally and will you start to project it publicly given that it's now reflected in your mandate?

[Tiff Macklem]

On the questions about employment, what we have begun doing—and I think has served us very well—is that we began publishing a wide range of labour market indicators. We actually updated that work with the publication of our monetary policy report a week and a half ago. I can come back and expand on that if you like.

The analysis of the labour market has been very useful through every stage of this pandemic. In the darkest moments, as I said in my opening remarks, unemployment was 13.4%. For many sectors, it was a lot worse; low-wage workers and women were particularly affected.

Now when you look at the labour market, you see that almost all of the indicators suggest that our labour market is very tight and has moved into excess demand, and that is being reflected in our monetary policy decisions.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Chambers.

We're moving now to the Liberals and MP Baker for five minutes.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you very much, Mr. Chair.

Thank you, Governor, for being here with us today.

I want to start by thanking you for showing, on your lapel, your support for the Ukrainian people. I also want to come back to something my colleague Julie Dzerowicz asked you about in her round of questioning. She asked you about your response to being sanctioned, and I believe you called it “trivial”. I don't disagree with your characterization, but I want to say that I think that what's not trivial is the fact that you and many others in this country are being sanctioned, which is a symptom of the fact that Canadians and Canadian leaders are playing an important role in supporting the people of Ukraine. I want to thank you for that support.

With that, Governor, my first question is around the causes of inflation. At this committee today there's been an ongoing discussion about the root causes of inflation. It's being discussed in the media across the country. As part of that dialogue, there's been some discussion that the bank's so-called “money printing” is the reason we see inflation where it is today. Could you comment on whether those characterizations are accurate?