Finance Committee on April 25th, 2022

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Go ahead, Ms. Sinclair‑Desgagné.

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

Thank you, Mr. Chair.

The issue I'd like to discuss may seem a little unexpected today, but it is just as relevant. I'm talking about the central bank's role in ensuring a stable financial system. It's funny because you just talked about that. The central bank's primary function is to control inflation, fostering confidence among investors and within the economy and thereby ensuring medium- and long-term growth.

You are one of the few public policy-makers who have to play that role in the medium and long terms, unlike lawmakers and parliamentarians.

Climate change poses a fundamental risk to our economy and the stability of our financial system. I commend you on the publication entitled “Assessing Climate Change Risks to Our Financial System”, which came out in January.

I'd like to know where we stand, given that other major economies have examined the issue and incorporated climate risks into their financial systems, despite the pandemic. Where is our central bank on the issue?

[Tiff Macklem]

I'll answer first, and then, I'll turn it over to Ms. Rogers to speak to price stability.

The first thing I want to point out is that climate change policy is decided by the government and Parliament. It is not our job to come up with climate change policy, but we do have a role to play.

Two aspects of our mandate are affected by climate change.

First, climate change can affect the stability of the financial system. A very quick change in certain asset prices could impair the financial system and have a negative impact on the economy. Ms. Rogers can give you more information about the study.

Second, climate change can affect monetary policy. Climate change can have a significant impact on the economy. That is especially true when it comes to the transition to a lower carbon economy, which will require huge changes. To fulfill our mandate in relation to price stability, we have to understand, and take into account, those negative effects when considering monetary policy.

[Carolyn Rogers]

With your permission I'll reply in English.

You referred to the study that we published in January. We did this jointly with the Office of the Superintendent of Financial Institutions, and the objective was to look at how climate change could potentially impact stability in the financial sector. Our number one job as a central bank, as the governor said, is price stability, but part of that job is looking at the overall stability of the financial sector. This is why we look at climate change.

The key message for us that came out of that study is that for an economy like Canada, particularly an economy that's dependent or has a large fossil fuel sector, there will be major structural changes regardless of how we deal with climate change. We're already seeing some of those effects. If you lived through last summer, you could see the effect of climate change on the Canadian economy, and it came at a time when we were facing other pressures.

The bottom line of that study is that there are structural changes that need to happen. The longer the runway we can give ourselves to deal with those changes, the less destructive they will be. If we delay policies, if we delay work to deal with those structural changes, they will become increasingly disruptive and have a negative effect on financial stability.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Sinclair‑Desgagné.

We're moving to the NDP, with MP Blaikie for two and a half minutes.

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

Thank you very much.

Governor Macklem, earlier in your remarks, I think you made reference to the fact that one of the things happening in this pandemic period has been a reduction in the demand for services and an explosion in the demand for goods of all kinds as people were at various times confined to quarters, so to speak, and looking for things to do and ways to improve their homes. Things are opening up a bit. It's hard to tell how reliable a trend that will be, depending on what happens with the virus, but things do seem to be opening up. There does seem to be a trend line there towards more open economies and more travelling of people between countries as well.

I'm wondering what signs you might be looking for when you talk about trying to dampen demand with rising interest rates, and if part of what's going on is an explosion in demand for goods as people are able to access services that they weren't able to access over the last two years. That will have its own dampening of demand within the goods sector, which is, I think it's fair to say, one of the main driving areas as between goods and services where inflation is occurring.

What are you looking for in order to get a sense that we might be seeing a return to a more normal balance between demand for goods and services and what that means for the bank as it contemplates interest rate hikes and other monetary policy initiatives?

[Tiff Macklem]

Yes, it is exactly as you've outlined. Through the pandemic, for services people wanted to buy and consume, they couldn't do it because that required close contact, so what happened was that people substituted that with goods. They couldn't go to the gym, so they bought home fitness equipment. They couldn't go to restaurants, so they bought better kitchen equipment. You could see this in the housing market in general. Many Canadians were working at home, their children were going to school at home and all the recreation was at home. Not surprisingly, they wanted bigger houses. That showed up in the housing market. If you want a bigger house, you want more furniture and new appliances.

Usually during recessions it's these durable goods that get hit more, because you can keep your old couch a little longer, but during the pandemic you were sitting on it all day. You were using it a lot more. It was very unusual, this big shift in demand for goods, and it wasn't just in Canada, it was globally. The effect of the very strong demand for goods, with these disrupted supply chains, is that we've seen very large increases in the prices of these goods.

As the pandemic recedes, we actually think that there will be some natural rebalancing of demand. We're already seeing it. People want to get back to going to the gym, going to their local restaurant and getting out, so what we expect to see is that the demand for goods will diminish as the consumption of services increases.

Now, overall, though, demand is running ahead of supply, so the average of that has to grow more slowly going forward than it's grown in the past, or else we're going to have ongoing inflationary pressures, so there are two things going on. We are looking very closely at this rotation from goods to services.

So far, what we've seen is a strong rebound in services. We're not seeing much reduction in demand for goods, and some of that may be related to these supply constraints. If you're trying to buy a car, well, it may take six months for you to get that car and for that sale to show up. We're not seeing yet much reduction in demand, and that's one of the reasons why the economy is strong. Hopefully, as those supply constraints diminish, people get the goods they wanted and we start to see more rebalancing. That's something we'll be watching closely.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Blaikie.

We're now moving to MP Fast for five minutes.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you very much.

Again, Governor, thanks for coming. We always appreciate you coming here and having an honest dialogue about the issues that are facing Canadians, especially at a time when we have this affordability crisis across Canada.

Given the current cost–of-living crisis, I think it's reasonable for Canadians to ask whether our Canadian dollar is safe and to ask you, as the governor, what the best hedge against inflation is.

[Tiff Macklem]

The best hedge against inflation is to get inflation down, so that people could stop worrying about it. That is really our primary focus.

With respect to the Canadian dollar, the Governor of the Bank of Canada does not give investment advice. The Canadian economy is strong. Canadians can have considerable confidence in the Canadian economy. They can have considerable confidence in the value of our currency. Our financial system is very stable. It has weathered this pandemic extremely well. Our trade situation is reasonably good. For many of the goods we export—oil, wheat, potash—prices are high, and global demand is very strong. The Canadian economy is in good shape.

Bringing it back to our mandate, the Canadian economy can handle higher interest rates. In fact, it needs higher interest rates.

[Ed Fast, Conservative, Abbotsford, BC]

I note Ms. Rogers' earlier comments about cryptocurrencies, and that they're not an appropriate hedge against inflation. I note that the Bank of Canada issued a staff report that addressed the issue of Bitcoin awareness, ownership and use. What jumped out at me was a statement:

Bitcoin owners were susceptible to certain risks, as evidenced by the fact that about half of current and past owners stated they had been affected by events such as price crashes, losing access to funds, scams or data breaches.

Are those some of the reasons why the bank doesn't recommend cryptocurrencies as a hedge against inflation?

[Carolyn Rogers]

Certainly. I don't think the bank recommends hedges, in general, but certainly, those are some of the reasons we don't see cryptocurrencies as a stable form of payment.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you for that.

Do you expect cryptocurrencies, either in the near or medium term, to ever replace the Canadian dollar as our legal tender in Canada?

[Carolyn Rogers]

As I said earlier, the government has initiated a study to look at digital currencies, in general, and to look at how their increasing popularity is affecting the economy and financial stability. One of the things that we've been studying for a number of years is whether or not we need a national digital currency, a central bank digital currency. As I said earlier, there are many underlying benefits to the innovations in digital currencies. They may hold potential to bring more efficiency to payments, and more competition to the financial sector.

It's really worth studying. The central banks have been doing that for quite a long time now. We have actually moved from a research stage into an early development stage.

Ultimately, whether or not Canada will have a central bank digital currency is a decision that Parliament will make. It's not one that the Bank of Canada will make. We view our job as to be ready, to have done the work ahead of time, so that if we decide that a central bank digital currency is something that would benefit Canadians, we're ready to provide it.

[Tiff Macklem]

I'll add that there are promising benefits from innovation in the financial sector. Having said that, we certainly expect the Canadian dollar will remain at the centre of the Canadian financial system.

[Ed Fast, Conservative, Abbotsford, BC]

That's what I wanted to know. Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Fast. That's the time. I know it went very quickly.

We're moving to the Liberals, and MP Dzerowicz, for five minutes, please.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you, Mr. Chair.

I'm hoping to ask three questions. The first one is on one of the motions that's before our committee that I'm hoping we get to study at some point. It deals with harmonizing regulations in Canada, across the provinces and territories, and eliminating all barriers that hinder the movement of goods, services and people.

To what extent do you think this is a priority for Canada, and how do you think it would impact Canada's growth and productivity?

[Tiff Macklem]

One of the things, to get back to one of your earlier questions, was the importance of productivity growth. I underline that productivity growth is at the foundation of rising standards of living.

When we look at things like interprovincial barriers to trade, you have to wonder what the purpose of these barriers is. We have a union. We have a country. To the extent that we can harmonize and have a free flow of goods and labour across the country, that means that resources can go to their highest value and their highest productivity.

It is something that governments across this country could do to improve productivity, and one of the beauties of it is it doesn't cost you a cent.

[Julie Dzerowicz, Liberal, Davenport, ON]

Do you think it's a priority for us?

[Tiff Macklem]

I think that we've seen through this pandemic tremendous levels of co-operation across this country, and I think it would be a good time.

This is a long-standing issue and there certainly has been some progress in some dimensions, but I think this would be a good time, because improving our productivity growth....

Productivity growth has been too weak for too long. We have grown more in this country through additions to the labour force. That's been great, but as we move forward, the labour force is going to be aging. We're not going to get as much labour force growth, and that is going to put more emphasis on the need for productivity growth for the Canadian economy to continue to grow at the pace it's been growing.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

My next question is about something that was part of your opening remarks. You talked about inflation and how it's impacting all Canadians but, most particularly, those on the lower end of the income scales, the most vulnerable.

Now that most of our social benefits in this country—the CCB, Canada worker benefit, OAS, CPP—are indexed to inflation, will that be helpful to alleviate some of the stress around inflation, and/or is there more that we should be doing at the national level to better support our most vulnerable?

[Tiff Macklem]

I know I've given you this answer several times, but the best way to solve this problem is to get inflation down.

Yes, the most vulnerable members of society are particularly affected by inflation. With the fact that inflation is quite broad now, more than two-thirds of the CPI basket is rising over 3%. Even if you are a very careful shopper, you cannot avoid higher prices, and there is a role for governments to protect the most vulnerable members of society.

Monetary policy is a broad macro tool. We can't target specific individuals. Those are decisions for governments and Parliament.

[Julie Dzerowicz, Liberal, Davenport, ON]

When I read about market insight globally, there are a number of economists who feel that monetary policy has been co-opted by markets, and that there is a need to return monetary policy to serving more of the real economy, rather than financial markets.

To what extent is that an issue in Canada? To what extent is this something that you're concerned with?