Finance Committee on Feb. 16th, 2023

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Which it did.

[Tiff Macklem]

—at a time when we're trying to cool demand to bring it in line with supply, yes, that would be a concern.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

In July 2020, you told Canadians “If you’ve got a mortgage or if you’re considering making a major purchase, or you’re a business and you’re considering making an investment, you can be confident rates will be low for a long time”.

Interest rates are now at 4.5%, 18 times higher than the 0.25% rate in February last year. You've also admitted that your previous statements that there would be deflation instead of inflation and that inflation would be transitory were a mistake.

Given this record, what assurances can you give Canadians that efforts you and the bank are taking today will work and not make Canadians' finances worse?

[The Chair, Liberal, Peter Fonseca]

MP Hallan, we are at time.

Governor, I'll give you 15 seconds, but we have to be pretty strict to get through this round.

[Tiff Macklem]

I think the assurance I can give to Canadians is that we have acted forcefully. As soon as we saw the momentum in the economy really picking up and inflation rising, we raised rates forcefully. It's starting to work, and Canadians can be confident. Canadians expect us to get inflation back to 2%, and we're determined to do just that.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Now we're over to the Liberals.

MP Sorbara, welcome to the committee.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Chair.

Welcome, Governor and Deputy Governor.

Governor, in your introductory remarks, you spoke about the imbalance between aggregate supply and aggregate demand. On aggregate supply things, there are things that policy-makers can and should do: encouraging productivity gains in the economy, putting in place policies and increasing the supply of inputs, one of them being labour.

Can you indicate the impact that policies are having on the aggregate supply picture in Canada with regard to labour, namely the implementation of a number of policies, including day care and the Canada child benefit?

[Tiff Macklem]

I'm going to go to the senior deputy governor and ask her to take this question. Thank you.

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

He's worn out.

What we have seen in the labour numbers are some really positive indications that the participation rate of women in the labour force has increased. We think that it is likely attributable, at least in part, to improved child care. We know that child care is a barrier to women's participation in the labour force. It's also probably the case that the more flexible work environment that's coming from two and a bit years of hybrid work is also contributing to women's participation. That policy has helped, and immigration has helped to bring labour supply into the market.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you.

On a different tangent, in the monetary policy report we look at the nominal neutral policy interest rate. The last time the assessment was done was in April 2022. The estimated range is currently around 2% to 3%.

When will that reassessment occur, and are there any indications on whether it is still within that 2% to 3% range?

[Tiff Macklem]

Once a year, we reassess our assessment of the neutral interest rate. In our next monetary policy report in April, we will be reassessing what our best estimate of the neutral rate is. I would underline that, whatever estimate we land on, there's quite a bit of uncertainty around exactly what the neutral interest rate is. It's not something we can observe directly.

The inflation-targeting framework is designed to deal with those kinds of uncertainties. If our estimate of the neutral rate was too low, that means that our inflation forecast would start to come in off what we think, and then we'd have to adjust to that.

Things like the neutral interest rate are not like a pandemic that just hits you. This thing probably evolves pretty gradually, so we'll start to be able to see some accumulated errors, and we can adjust. That is one of the benefits of the inflation-targeting framework. It addresses the fact that there are these uncertainties that we have to manage.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

When the Bank of Canada sees the output gap closing, because it is on the positive side, generally in the past we would say that the output gap is on the negative side, and it's very hard to estimate. I'm assuming it's still hard to estimate on the positive side, but in a quarter reference, when do we see that output gap coming into balance?

[Tiff Macklem]

Let me answer that in two ways.

First of all, all the indicators suggest that the economy is clearly in excess demand. You referenced that there's a particularly a wide range of labour market indicators that suggest that the economy remains overheated. If our forecast is correct that growth is around zero for the first three quarters of this year, that gap is going to shrink reasonably quickly. It's always a little bit hard to say exactly when it's going to flip from positive to negative, because you get a small positive or small negative, but our own forecast suggests that it would happen some time in the first half of this year.

As I said, I wouldn't get too hung up on exactly when it flips. What you really want to watch for is excess demand really diminishing, because that's what will relieve those domestic inflationary pressures, and that's critical, particularly to get services price inflation down.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Sorbara.

Thank you, Governor.

We're now moving to the Bloc and MP Ste-Marie.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Mr. Macklem, I want to discuss something else entirely, the assessment of risks at the international level. As we know, the U.S. trade deficit is driving demand for Chinese manufactured goods. Those companies tend to reinvest their massive profits in dollars in the U.S. finance, insurance and real estate industries. Currently, we are seeing the joint development of big tech and Chinese finance. Some see that as a potential dislocation. Accelerating that change seem to be the war in Ukraine and the economic sanctions against Russia, which are resulting in the dislocation of finance.

How do you assess that risk in light of the international economy and the financial and monetary system?

[Tiff Macklem]

As you pointed out, there is tremendous uncertainty in the world.

Geopolitically speaking, the tensions between the U.S. and China, in particular, are clearly continuing to mount. In the short term, we are committed to bringing inflation down to target. Yes, there is a risk that a sudden event could affect supply chains. However, I'd like to talk about the longer-term situation, as I did in December, in British Columbia.

Over the past 20 or 30 years, China's entry into the global economy and its growing supply chains have helped lower the inflation rate, especially for traded goods. It is very likely that that will cease in the future. In fact, the opposite could happen, so we could see more pressure on goods prices for quite a while. That's something we have to take into account when setting a target inflation rate.

From time to time, some suggest that, once inflationary pressure has ended, it may be necessary to raise the inflation target. We think that would be a serious mistake for two reasons.

First, when inflation is low, Canadians can count on the fact that the cost of living will not change significantly. If inflation goes up every year, the rise in the cost of living will be greater.

Second, the situations you described could certainly happen in the future, but a higher inflation target would make it harder to respond to those realities.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Merci, Governor and MP Ste-Marie.

We'll now go to MP Blaikie for two and a half minutes.

[Tiff Macklem]

It takes me a little longer in French. Give us an extra 30 seconds.

[The Chair, Liberal, Peter Fonseca]

Yes, it's a little longer. We allocate for that.

MP Blaikie, go ahead, please.

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

You indicated, before, that you'll be keeping an eye on government spending and assessing how various kinds of spending contribute to aggregate demand.

There are a number of examples I might mention. I'll start with two.

One that might count as an expenditure is the government implementing a low-income CERB repayment amnesty, so that folks under the poverty line don't have to pay back CERB debt they owe. There are a lot of folks asking for this. It's reasonable for government to expect that people below the poverty line don't have the money to pay back that debt, anyway. There's a significant investment of resources, at the moment, in chasing that debt. Writing it off would count as an expenditure. I'm curious to know whether that is an expenditure you would see as one that contributes to aggregate demand. I think there are some very good reasons not to see that kind of expenditure in that light.

A second example I'd like to hear your thoughts on is investment in affordable housing. Obviously, that creates some demand in the construction market. There are finite resources there, although there are a lot of people in the trades who are currently unemployed, as well—supply and demand are not always a match there, even in the present moment. While construction resources contribute to demand in the short term, in the medium term and in the long term, they help augment supply to meet demand in housing. Housing people takes them out of market competition for rental apartments or...prospective home buyers who land in one of those suites.

How would the Bank of Canada interpret a large investment, for instance, in creating more affordable housing units or writing off pandemic debt?

[Tiff Macklem]

I'm going to ask the senior deputy governor to take that.

[Carolyn Rogers]

Let me start by giving you some ideas about how generally to take on our advice about spending because all members are asking the same question.

We publish a monetary policy report quarterly that tells you all the things we think are affecting inflation, where we think inflation's going to go and how we've arrived at our decision. We've also now started to publish a summary of our deliberations for each decision. If you read the summary of deliberations, you can see exactly what things our governing council discussed as contributing to the path of inflation.

You have a near quarterly update on those things that we think are affecting inflation.

As we've said, our current forecast is based on everything we know, including what we know governments, both federal and provincial, are planning to spend. As those plans change, you'll see us feed those changes into our monetary policy report and into our summary of deliberations.

You always have this opportunity to ask us the question, but you also have a quarterly update on our thinking on this topic.

[The Chair, Liberal, Peter Fonseca]

Thank you, Senior Deputy Governor.

Can you close off quickly, please?

[Carolyn Rogers]

I would say that the first plan you asked about is an example of a very targeted and temporary measure using the IMF framework.

On the second, the bank has talked for a long time about the need to get to a more balanced housing supply, but we would need to take the details of each spending plan on board and determine what effect they would have.