Finance Committee on April 25th, 2022

[Tiff Macklem]

Monetary policy works through markets. We have a modern, market-based economy in Canada, and markets are at the core of a lot of our prosperity.

Monetary policy has a very clear mandate. We make our decisions to pursue our mandate in the best interests of Canadians, and markets adjust to that.

I don't think this is a problem in Canada.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Governor and senior deputy governor, thank you for all the questions you've been answering.

We are moving into our final round. I know members still have a lot of questions.

I'm looking at the time, members. As we do on this committee, when we don't have enough time for a full final round, we divvy up the time equally. I'm looking at about three or four minutes for each party.

We'll start with the Conservatives. I believe it's MP Chambers.

[Tiff Macklem]

We will try to shorten our answers.

[Adam Chambers, Conservative, Simcoe North, ON]

Excellent. I much appreciate it.

You mentioned excess demand. Has some of this excess demand been created by the overly loose monetary and fiscal policy that we see?

That has to be a somewhat contributing factor to the excess demand that we see, like kind of a simple—

[Tiff Macklem]

Our policies have been very effective in getting us out of a huge hole. The economy has moved into excess demand and now it's time to adjust to that.

We have certainly started. We signalled very clearly to Canadians. We have some more work to do.

[Adam Chambers, Conservative, Simcoe North, ON]

That's fair enough.

Earlier, you mentioned spending. There was a 25% increase in government spending from prepandemic levels to now. Blink twice if you feel like you're being held hostage by overly loose fiscal policy. I'm just kidding. Don't answer that. I know you won't.

The risks to the outlook seem to be painted as still rather optimistic when it looks like the best-case scenario is being presented as some of the base case. I know we have increased inflation a bit, but wage growth in the U.S. has been significant. Again, government spending continues to be significant. On household balance sheets, there's still a lot of money sitting in bank accounts. If we're in excess demand, that gets deployed. I think that's a bit of a risk.

The bank again says that the risks to the outlook are balanced. I think that's probably the fourth or fifth time we have heard that.

What makes this time different from some previous times?

[Tiff Macklem]

I will say two things.

I think there are risks on both sides and there are some upside risks. You highlighted a few of them. The balance sheets of Canadians are better. Canadians do have roughly $200 billion of excess savings—it's a funny word—or more savings than we think they would have had if there hadn't been a pandemic. It comes back to Mr. Blaikie's question. They haven't been able to consume a lot of things they wanted to consume, so they have been saving the money.

In our outlook, we are assuming that they spend a good part of that, but they could spend more, so there could be some upside risks.

There are also some downside risks. We have been pretty conservative in our assumptions. We're not assuming that there are any price reversals in these durable goods prices. We think they are going to stabilize, but they don't fall back. If there are reversals, inflation actually could come down faster.

There are risks for both sides, but my second point is important. With inflation at 6.7% and with an outlook for inflation remaining well above our target range for the whole of this year, we are more concerned about the upside risks than the downside risks.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

We're going to see used cars now added next term, so that's going to bump it up even more.

We have never been more indebted as a nation—private sector debt, public sector debt and consumer debt. That's another significant risk.

Should we start warning Canadians now about debt levels, more than we have been? I know you have been recently, but is this something we really need to be concerned about? We have never seen these debt levels.

[Tiff Macklem]

Maybe I will ask the senior deputy governor to say a word about the household balance sheets.

[The Chair, Liberal, Peter Fonseca]

Answer really quickly, please. You have 15 seconds.

[Carolyn Rogers]

You said it well. This is a risk the Bank of Canada has been warning about for years, well before the pandemic.

As I said earlier, we do think households and companies that have high levels of debt will be more sensitive to interest rate risks. As we point out, the excess savings sitting in household balance sheets could also moderate the effects.

We will be watching. As the governor said, there are risks on both sides.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Chambers.

Now we're moving to the Liberals.

MP Baker, you have the floor.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thanks very much, Chair.

Governor, before Russia's invasion of Ukraine, we already had a supply chain that was choked up, which was driving up inflation around the world.

Can you characterize what the situation was then and how it's being exacerbated now by Russia's invasion of Ukraine?

[Tiff Macklem]

Yes. If you go back to January—and I don't have the January report in front of me—before the war, we were starting to see some beginnings of easing of these supply chain disruptions. I would say that they were somewhat tentative, but if you looked at shipping delays, for example, they'd certainly peaked and they were starting to get through. On computer chips, for example, we were seeing some evidence that supply was improving. You saw some rebound in our own car production as they got the chips that they needed.

I would say that things were not improving perhaps as rapidly as we might have hoped, but they were starting to improve.

The war has certainly been a new setback. It is causing, particularly in Europe, some new supply chain disruptions. Certain key components of the supply chain that are produced in Ukraine—or Russia, for that matter, but more Ukraine—for example, neon, are not available now.

I think that what is more significant, certainly for Canada, is that global shipping is being disrupted.

Then, the other element I would highlight is what new outbreaks of COVID and new lockdowns in China are causing. The Port of Shanghai is very backed up at the moment.

So war and COVID continue to disrupt supply chains. We do expect, as we get into the second half of the year, that these things will work their way out. However, yes, there is considerable uncertainty about these supply chains, and unfortunately that's not going away soon.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you for that.

As a follow-up, Ukraine is one of the world's largest food producers. Russia is obviously a very large food producer as well. Because Ukraine is unable to export most of its food exports—if not all of them—could you talk about the impact that's having on global food prices? Is that impacting food prices here in Canada?

[Tiff Macklem]

First of all, the Ukraine economy has been devastated. In Washington last week, the finance minister from the Ukraine, Minister Marchenko, was there. I had a chance to speak to him on a number of occasions. I will say that the resilience and courage of the Ukrainians are incredible. They are moving ahead with their intention to plant their crops. Hopefully that can continue.

The big challenge, though, as you alluded to, is at the harvest: How do they get the crops, and how do they transport the crops? If they don't have access to shipping, there will be a very serious problem.

The IMF in particular, as well as the World Bank, has been highlighting the implications for food security, particularly in countries in northern Africa, which get a lot of their wheat from Ukraine. This is a serious threat.

I think the G7 and other leading nations are focused on this risk and looking at what can be done, but I won't pretend that it isn't a worrisome situation.

[The Chair, Liberal, Peter Fonseca]

Thank you.

We're moving to the Bloc and Madame Sinclair-Desgagné.

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

Thank you, Mr. Chair.

I want to pick up our earlier discussion on incorporating climate change risks. Since I am asking the experts, I would really appreciate a clear and specific answer.

My question is this. What risks will the central bank incorporate into its modelling, and how? I am referring to the risks associated with global warming, as well as those associated with the transition, so all the risks. How will they be incorporated? I am especially interested in finding out when Canadians and Quebeckers will be able to rely on the central bank to incorporate those risks.

[Tiff Macklem]

I would point to a few things.

The first thing I should note is that the study we released lays out various scenarios. There is a lot of uncertainty around the effects of climate change and the associated risks, and we don't have the ability to make those predictions. However, having scenarios to assess those risks is extremely helpful and important.

The scenarios were based on the risks stemming from the transition to a zero-carbon economy, but the scenarios do not include physical risks, such as more frequent storms and droughts. We will nevertheless take those risks into account at a later stage.

Recent events have brought to light another aspect, time frames. Even our scenarios take into account time frames for initiating the climate transition. As Ms. Rogers pointed out, delaying policies is more costly.

That said, the scenarios are probably overly optimistic because the modelling includes assumptions for climate policy and forecasts. Under the scenarios, investments in new energy sources will become accessible as investments in oil drop, and coordination isn't really a problem.

Throughout the world, energy security is becoming increasingly important, but it isn't clear that supply will be able to meet demand.

We have a great deal of modelling work to do in terms of a scenario that involves weak coordination.

[The Chair, Liberal, Peter Fonseca]

Madame Sinclair-Desgagné, that's the time.

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

I have a quick question for you.

When do you expect a future study to take into account physical risks?

[The Chair, Liberal, Peter Fonseca]

Be very quick.

[Carolyn Rogers]

We're working on it now. We'd be happy to give you a more detailed briefing on this.