Evidence of meeting #68 for Finance in the 44th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was inflation.
A video is available from Parliament.
November 23rd, 2022 / 5:55 p.m.
Governor, Bank of Canada
We need a solution. What I'm telling you is that the bank will make losses for a period. It will go back to profitability, and provided we can use those profits in some way to fill in the deficit—
Conservative
Governor, Bank of Canada
Yes, today.... We need a solution to allow us to do that. That is correct.
Conservative
Andrew Scheer Conservative Regina—Qu'Appelle, SK
Under the existing framework of the bank, the solution for this operating loss is that Canadian taxpayers will be bailing out the Bank of Canada so it can continue to pay those interest payments to large financial institutions here in Canada.
Conservative
Andrew Scheer Conservative Regina—Qu'Appelle, SK
Barring a legislative change, that is what will happen, right? We have to deal with the terms that exist as they do today.
Governor, Bank of Canada
I think what's going to happen is that there will be a solution to the problem.
Conservative
Andrew Scheer Conservative Regina—Qu'Appelle, SK
You're counting on that. You're counting on something that does not exist today.
Conservative
Andrew Scheer Conservative Regina—Qu'Appelle, SK
Okay.
You talked about the inflation being unrelated to monetary policy, and related more to a gap between supply and demand—supply shrank while demand increased.
Would you be less dependent on interest rate hikes if the government pursued a pro-growth policy and increased the ability of Canadian companies and businesses to increase their supply? If supply went up, would the pressure on you to raise interest rates diminish?
Governor, Bank of Canada
As I responded to a previous question, there are two elements to getting demand and supply in balance: supply and demand. Demand is well above supply. The more supply comes up, the less demand will need to come down. Given that any actions taken on supply will take time, and that the economy is clearly in excess demand, there is a need to slow demand. From a monetary policy point of view, the tool we have affects demand, not supply.
Yes, the more governments and parliamentarians take actions that augment the supply side of the economy, the more room there is for the economy to grow without inflation.
Liberal
The Chair Liberal Peter Fonseca
Thank you, MP Scheer.
To finish off this round, we're moving to the Liberals.
I have MP Dzerowicz for five minutes.
Liberal
Julie Dzerowicz Liberal Davenport, ON
Thank you so much, Mr. Chair.
Thank you for this excellent discussion today.
During the pandemic, Governor, you were very cautious about raising rates. There was concern that, if you raised rates too quickly, companies would not be able to come back. On the other side, we're seeing the fastest, most dramatic rate increases in history in this country. There are those who believe that, perhaps, you're moving slightly too quickly—not giving workers and companies a chance to adjust to these increases and try to minimize some of the downsides to both.
My question to you is twofold: First, how would you respond to this? Second, how do you weigh the trade-off of risks between increasing rates of inflation and a possible recession?
Governor, Bank of Canada
Thank you for the question.
As you highlighted, we have been raising rates very rapidly, and that is deliberate. The reason for this is that we think the best chance of getting inflation back to target, without a severe contraction, is front-loading the response. One of the big dangers, when inflation goes up, is everybody starting to believe it's going to stay up. It's then much harder to get it back down. By front-loading the response and being very clear that we are determined to get inflation back.... I think that has been helpful in keeping inflation expectations well anchored, so inflation will come back to the 2% target.
The other element is that you want to, fairly quickly, stop inflation from going up and get it to come down. Yes, we're out there promising Canadians that inflation is going to come down, but they're only going to be convinced when they see it starting to come down. By front-loading the response, that.... It takes time for monetary policy to work through. Interest rates were very low. They needed to come up quickly to prevent inflation from going higher and to start getting it on a downward path.
Yes, it has been a historically rapid increase. We think that's the best way to avoid having to do even bigger increases in the future and having an even more severe slowdown.
Liberal
Julie Dzerowicz Liberal Davenport, ON
Thank you.
The other question I have is this. I believe that when you came before us in an earlier session, there were savings of around $11 billion of what Canadians have put into their bank accounts. To what extent are you looking at where those savings land in some of your decisions?
To what extent are you also looking at other factors, like bankruptcy rates of companies and fixed mortgages? I believe 80% of all mortgages in Canada are fixed at five-year rates. I could be wrong on that, but I think that's what CMHC has said.
To what extent do you look at those types of factors to see how quickly and how much you might be increasing your rates?
Governor, Bank of Canada
We look at all those factors. With respect to bankruptcies, they have been very low for the last two years. If you look at things like credit card delinquencies, they have been very low. Those things are moving back up to more normal levels, so that's something we're keeping an eye on, but they are not above normal levels. They are just getting back.
I don't know if the senior deputy wants to say a few words about the proportion of fixed versus variable.
Senior Deputy Governor, Bank of Canada
Sure.
To your previous point about what we called excess savings—savings over what would have been the normal rate—for some time, I think the bank anticipated that savings would eventually be drawn down, particularly once the economy fully opened. We thought Canadians would spend more of that savings.
We have since adjusted our expectation. We haven't seen Canadians draw down that savings on a large scale. In our forecast, we now expect that will probably stay in people's savings accounts.
Liberal
Julie Dzerowicz Liberal Davenport, ON
I want to point out something. It seems weird that there's that savings, but also that you're seeing this increase in debt levels of Canadians. It's this really weird contradiction.
How do you explain that?
Senior Deputy Governor, Bank of Canada
As we've said, inflation and adjustments in interest rates both affect.... There is no one Canadian. There are young Canadian homeowners who are just starting out and are new in their career. They have just purchased a house. House prices have been elevated. They are carrying large debt loads. Fast-forward 20 or 30 years, and hopefully you have paid down your house and accumulated more savings.
The averages can hide a lot of diversity across Canadians. If you think about the different generations, different households and different socio-economic groups, there is a lot of diversity. Inflation and adjustments in interest rates don't affect everybody.
Liberal
The Chair Liberal Peter Fonseca
Thank you, MP Dzerowicz.
Members, I'm looking at the time. I believe we have enough to get through one final round here. I will be very strict with the time. I know you have very detailed questions and detailed answers, and they have been terrific, but we will have to be quite strict with the time right now for this final round.
We're starting off with the Conservatives and MP Scheer for five minutes, please.
Conservative
Andrew Scheer Conservative Regina—Qu'Appelle, SK
At the very end of my first round, I asked if you could provide to the committee the valuation of the difference between the bid and the ask price on the government bond, so that we could see how much those large institutions that were involved in the swaps would have made off them.
I want to verify that's something you can provide to the committee.
Conservative