Finance Committee on Nov. 23rd, 2022

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Chambers.

Now, moving to the Liberals, we have MP Chatel for five minutes.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you, Mr. Chair.

Ms. Rogers and Mr. Macklem, thank you for being with us today.

My riding includes two RCMs that are among the poorest in Quebec. I have visited the food banks in our area, and the situation is difficult, I will not hide it from you. But what I'm hearing today is that we're going to suffer for the time being, but that good news is coming. When people are suffering, but they can see the light at the end of the tunnel, it helps them a lot.

Can you repeat, in simple terms, how the measures you are putting in place are going to control inflation and get it back to 3% by the middle of next year, which is a few months from now?

I would like to hear the message you have to offer to the people who are suffering today.

[Tiff Macklem]

There are two important aspects.

First, the economy is slowing down, that's true. We expect almost zero growth for about three quarters, the fourth and last quarter of this year and the first and second quarter of next year. In the second part of next year, growth will pick up again and, towards the end of next year, the inflation rate will fall to 3%. Currently it is around 7%. Unfortunately, we expect it to remain quite high for the rest of this year. It will start to come down next year, to about 3% towards the end of next year. So it's going to take a while.

That said, we see that monetary policy is already starting to have an effect in those sectors that are interest-rate sensitive. Inflation has not really come down, but it has stopped rising. We are following the indicators closely and we think that inflation will start to fall early next year.

[Sophie Chatel, Liberal, Pontiac, QC]

I think that not only the legislator, but all the actors, like the Bank of Canada, are doing the right things at the moment, and we are aligned to solve the inflation problem. Do you agree?

[Tiff Macklem]

We are not there yet. It is important that the competition system work better.

As I said before, we are currently seeing that companies are able to pass on price increases to consumers. When inflation is low and the economic situation is more normal, companies don't want to raise their prices, because they are afraid that their customers will go shopping at other companies. The problem when inflation is high is that everyone sees that prices are going up, so companies are not afraid of losing customers.

[Sophie Chatel, Liberal, Pontiac, QC]

So we need more competition.

[Tiff Macklem]

In fact, reducing inflation allows, among other things, competition to work better.

[Sophie Chatel, Liberal, Pontiac, QC]

One of the points mentioned earlier was the aging population, which creates a labour shortage in the employment sector. Immigration will replace this labour force, but retirees will not stop consuming and immigrants will also consume.

Do you think that investing very seriously in creating good jobs, well-paid jobs, is a good strategy, given that there is always going to be some pressure on that side?

[Tiff Macklem]

It's always better to have a better job. Everyone wants a good job.

The important thing here is training. We need more immigration, of course, but it has to be said that technology is becoming more and more important in almost every job. It is the productivity of a company that allows it to offer higher wages. If a company provides more training and invests in the best tools available, then workers will be more productive, and their wages will be higher.

Education is the responsibility of governments, especially provincial governments. Training is also the responsibility of business, especially in a very tight labour market, where it is difficult to find people with more training. In this context, it is wise to hire people who do not yet have the required knowledge, but to offer them training, and to offer this training also to people who are already employed by the company, so that they can be more productive.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor.

Thank you, MP Chatel.

Now, members, we're moving to our third round.

We're starting off with the Conservatives, with MP Morantz, for five minutes.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you, Mr. Chair.

Governor, there are a couple of areas I want to explore with you.

One thing I'd like some clarity on is this: You've explained that quantitative tightening is designed to reduce inflation, but you maintain that quantitative easing wasn't the cause of it. I want to bring you back to the testimony you gave on November 1 to the Senate, where you were asked a similar question about this and you went into interest rates. You said that quantitative easing was simply a tool of the bank to control interest rates.

The trouble I'm having is that there seems to be an inherent conflict between these two positions. How can you, on the one hand, say you're relying so heavily on quantitative tightening to get inflation under control, but you won't go so far as to say that it was quantitative easing, the creation of an expansion of the money supply, that was a major factor in causing inflation?

[Tiff Macklem]

I don't think there's any contradiction.

First of all, I underline that our primary instrument, whether we're lowering interest rates or raising interest rates, is the interest rate. Quantitative easing and quantitative tightening are complementary tools. When you can't lower your policy interest rate any further, you have to find a different way to lower interest rates, and that's what quantitative easing does. It pushes interest rates further down the yield curve.

Our primary instrument is interest rates. We're raising those rapidly. We're also using quantitative tightening. That is complementing the increase in our policy rate by pushing interest rates further up the yield curve. So they—

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

I'm sorry, but I have limited time.

[Tiff Macklem]

I don't see that there's a contradiction.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Okay. Simply put, do you think quantitative easing was a factor in increasing inflation?

I want to bring you to Professor Ambler's point. He basically asked why the bank won't admit that there's a causal relationship between quantitative easing and inflation. It seems like a fairly straightforward question for an economist: Is there or isn't there?

[Tiff Macklem]

I think quantitative easing was used together with our lowering of interest rates and exceptional forward guidance. That package of monetary stimulus was very important to delivering a very strong recovery. With hindsight, if we had known a year ago everything we know today, yes, we probably would have started tightening monetary policy sooner. I would remind you that we ended quantitative easing more than a year ago.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Okay. I appreciate that answer.

There's another aspect to this that I want to talk about and that I haven't been able to get clarity on from the bank either. It has to do with government stimulus spending.

We've had a unique event happen in terms of the government's fiscal position over the last two and a half years, which is that they have borrowed an additional $500 billion and ballooned the deficit from $725 billion to $1.2 trillion. Doesn't that event, in and of itself, become a factor that would cause increased inflation?

[Tiff Macklem]

So—

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Is it a factor? You said there were a number of factors.

[Tiff Macklem]

Yes.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

I'm asking you to parse that one out: Is it a factor in increasing inflation?

[Tiff Macklem]

The fiscal stimulus, together with the monetary stimulus, was an important factor that generated the very strong recovery. Certainly, from a monetary policy perspective, as I've already indicated, if we knew everything a year ago that we know today, yes, I think we should have started tightening interest rates sooner to withdraw the stimulus.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Do you think that if the government....? For example, if the deficit spending had been half of that—$250 billion instead of $500 billion—would inflation have been less?

[Tiff Macklem]

There would have been less stimulus in the economy.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Could you repeat that? I couldn't hear you.