Finance Committee on April 25th, 2022

[Tiff Macklem]

We had a very strong response in the depth of the pandemic. Two years ago the economy was in a huge hole, roughly 15% below its prepandemic level, and monetary policy, which included lowering the policy rate using exceptional forward guidance and quantitative easing, was instrumental in supporting the recovery. I'm certainly not going to take all the credit. Fiscal policy, very effective vaccines and just the adaptability and resilience of Canadians were extremely important as well.

I guess the way I would put it is that we're raising interest rates now, and we've signalled that we need to normalize monetary policy reasonably quickly. That's not because our policies failed. That's because they were very effective, and we're now dealing with the other side of that.

As I've said, did we get everything right? No. We have been surprised, in particular, by the persistence and the pervasiveness of these supply constraints. Inflation is now too high, and we are normalizing policy to bring inflation back to target, and Canadians should be confident that we will succeed.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you very much.

Let me start with this. Do you believe there is a way for Canada or for Canadians to entirely opt out of inflation? Specifically, are cryptocurrencies a way, for example, to opt out of inflation?

[Tiff Macklem]

I'm going to ask our senior deputy governor to weigh in on that one.

[Carolyn Rogers, Senior Deputy Governor, Bank of Canada]

One of the benefits of low and stable inflation is that prices remain stable. I think that if Canadians are looking for a stable source of payment and stable value, cryptocurrencies don't really meet that test. Over the last year or two, the volatility of cryptocurrencies has been higher than that of gasoline, the Canadian exchange rate and most commodities, so we don't see cryptocurrencies as a way for Canadians to opt out of inflation or as a stable source or value.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you.

We've seen over the past few months a few instances in which cryptocurrencies have been used to avoid global sanctions, such as those placed on Russia, or to fund illegal activity. The federal budget is putting forward $17.7 million to launch a financial sector legislative review, with its first priority being a review of cryptocurrencies and stable coins.

I have only about 30 seconds left, but could you briefly discuss the risks to financial stability and national security caused by the rise of digital assets and cryptocurrencies?

[Carolyn Rogers]

I think this is exactly what the legislative review is designed to look at. Cryptocurrencies or the underlying technology in cryptocurrencies holds some promise. There's some important innovation there, and I think the legislative review will allow us to explore that innovation but also to look for ways we can get at those benefits in a more regulated environment to make sure Canadians who want to use these digital forms of payment are also protected.

We don't see a trade-off between innovation and regulation oversight, but certainly with the increase in digitalization in the financial sector, it's important that we undertake the right level of research and development. That's what the central bank is doing right now, and that's what the legislative review is designed to do.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you.

[The Chair, Liberal, Peter Fonseca]

We are moving to the Bloc and we have Madame Sinclair-Desgagné for two and a half minutes, please.

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

Thank you, Mr. Chair.

Similar to my previous line of questioning, I'd like to talk about domestic and international determinants of inflation. Canada introduced a variety of support measures. Given that the determinants of inflation are for the most part international, and to a lesser extent domestic, would extending the support measures have an impact on inflation? They are supposed to end next week. Can you say whether those programs would or would not have an impact?

[Tiff Macklem]

There are two parts to that answer.

The first thing is that, most of the time, inflation is caused primarily by international pressures. However, I want to stress the importance of keeping inflation expectations well anchored on our target, because if we don't, when those pressures moderate, inflation will not go down. Conversely, if those expectations are well anchored on the target, we will see a decrease.

The other aspect of inflation—and this has more to do with your question—relates to domestic pressures. Right now, the economy is in excess demand. The overall economy has fully recovered from the pandemic, and measures that further contribute to demand will exacerbate excess demand. In that case, we would have to raise interest rates further or we wouldn't be able to lower the inflation rate to reach our target. Inflation affects every Canadian's household budget, so it's very important for all Canadians that inflation remain anchored on the target.

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

Thank you, Mr. Macklem.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Sinclair-Desgagné.

We are moving to the NDP.

MP Blaikie, you have two and a half minutes, please.

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

Thank you.

When we talk about inflation, there are certainly those who would like to say that government spending is the only determinant of inflation, so I talked a bit earlier about some of the other factors that we might see.

Looking internationally, there are as many unique examples as there are countries in the world, but Japan is a country that operates with a debt-to-GDP ratio that's astronomically higher than Canada's. It's in the region of about 250%. They've been cited by some other parliamentarians sometimes as an example of low inflation, although usually the debt-to-GDP ratio isn't included in that reference.

I wonder whether you've done some thinking about that and what lessons we might draw from comparisons with a country such as Japan, which is clearly operating its economy in a very different way from Canada.

[Tiff Macklem]

You have to be very careful drawing much inference from the Japanese economy to the Canadian economy. The Japanese economy is a very different economy in so many ways.

In fact, if you compare Canada to other economies that would be more comparable, such as the United States, Europe, Australia, Sweden or the U.K., you'll see much more common ground, much more similar experience. In all those economies, inflation is too high. In all those economies, monetary policy is increasingly geared towards normalizing monetary policy. That's going to happen at different paces, because the circumstances of these countries are in different places in terms of how far they are along in their recovery. Those would be a better comparison.

I would be careful about that, because there are some very unique features of Japan that other members of the G7, for example, just don't share.

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

Does that play out in conversations when you have central bankers from the seven countries sitting around the table?

[Tiff Macklem]

Actually, I was just in Washington and talking with Governor Kuroda.

Japan has its own monetary policy. It has its own currency. It has a flexible exchange rate. They are taking decisions that are geared to the situation in Japan, and that's being reflected in their exchange rate. That's the way the international monetary system works. Different countries will take different actions based on the situation in their country, and the international order, through the exchange system, will adjust to accommodate that.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Now we'll go to the Conservatives and MP Albas for five minutes.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

Thank you to the governor and the senior deputy governor for being here today in person.

Governor, you sound a little hoarse today and I think it's probably because you've been saying over and over to everyone who will listen to you that inflation is too high and that we need higher interest rates. You got a lot of things right and a lot of things wrong, the economy is moving to excess demand, and we note that you want to keep inflation expectations well anchored, and demand is exceeding supply.

Stephen Tapp from the Canadian Chamber of Commerce has noted that the nominal policy rate of 1% is still below the bank's estimate of the neutral rate, which is between 2% and 3%. He further noted that until your rate rises above 2% to 3%, “the Bank is pouring gas on the inflation fire”.

I know that the government can't help itself, it spends at any time it can, but you're different, Governor. Your institution is independent and your number one job, as of last December, is still price stability.

What is your explanation for continuing to pour gas right now on inflation?

[Tiff Macklem]

We are raising interest rates. We took the unusual step a week and a half ago of raising it by 50 basis points. We also started quantitative tightening, something that we've never done before, and we've signalled that there are more increases to come, so we are responding to the situation.

I am quite confident that higher interest rates.... If you look at five-year mortgage rates and you look at the the expectation of further increases already being priced in, that is already having an effect on the economy. I do expect that is going to moderate spending.

We don't want to overheat the economy. We also don't want to overcool the economy. While we're certainly responding and moving quickly, you do want to do this in a series of steps and look at the impact and then calibrate your response to bring inflation back to target.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

In your own monetary report, Governor, the report itself says that the bank typically looks to do policy on a six- to eight-quarter basis, so most of the effect of the April 13 decision won't be fully implemented and integrated into the economy until between six and eight quarters.

When did you start quantitative tightening? I believe it was last night.

[Tiff Macklem]

We stopped quantitative easing last November and yes, as of today, we have started quantitative tightening.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Again, those changes take a long time to factor into the economy, Governor.

So the question would be, to what extent does the fact that many Canadians are heavily indebted restrict the Bank of Canada from raising interest rates to reduce inflation?

[Tiff Macklem]

I'm going to ask the senior deputy to take this one.

[Carolyn Rogers]

I'd make two points.

It's true that monetary policy is forward looking. It does take a while to work through the economy and the financial sector before it has a direct effect on inflation; however, the signalling effect of our path to normalization is already being seen, particularly in mortgage rates.

To come back to your other question, though, we are aware of elevated debt levels in the Canadian economy. It's something the Bank of Canada has been talking about for a long time now, from well before the pandemic. We do anticipate that will make the economy more sensitive to interest rate changes and we will be watching that. As the governor said, we take all of those signals in as we make each decision.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

With all due respect, senior deputy, Mr. Macklem was on the record where he said to Canadians at the beginning of the pandemic not to worry because “interest rates are very low and they're going to be there for a long time”, I think, for several years.