Finance Committee on Feb. 16th, 2023

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order. This is meeting number 77 of the House of Commons Standing Committee on Finance.

At our last meeting, I was unable to be here. I want to thank MP Hallan, our vice-chair, for chairing that meeting. I know it was an in camera meeting. From what I've heard, it was very collaborative, efficient and expedient, so I want to thank all members very much for all that hard work.

It's wonderful, at the start of 2023, to have Governor Macklem and Senior Deputy Governor Rogers joining us.

Pursuant to Standing Order 108(2) and the motion adopted on Monday, November 21, 2022, the committee is meeting, from 11:00 to 12:30, to discuss the Bank of Canada's report on monetary policy. Pursuant to Standing Order 108(2) and the motion adopted on Thursday, February 2, 2023, the committee is meeting with the Department of Finance, from 12:30 to 1:00, to discuss the Select Luxury Items Tax Act and Bill C-19.

Today's meeting is taking place in a hybrid format, pursuant to the House order of June 23, 2022. Members are attending in person in the room and remotely using the Zoom application.

I'd like to make a few comments for the benefit of witnesses and members.

Please wait until I recognize you by name before speaking. If you are participating by video conference, click on the microphone icon to activate your mike, and please mute yourself when you are not speaking.

For interpretation, those on Zoom have the choice, at the bottom of their screen, of “floor”, “English” or “French”. Those in the room can use the earpiece and select the desired channel.

I remind you that all comments should be addressed through the chair.

For members in the room, if you wish to speak, please raise your hand. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as best we can, and we appreciate your patience and understanding in this regard.

To commence, we have with us the Governor of the Bank of Canada, Tiff Macklem.

Welcome, Mr. Macklem.

Joining Mr. Macklem is the senior deputy governor, Carolyn Rogers.

Welcome, Ms. Rogers.

Please go ahead with your opening remarks. The members will then look forward to asking you questions.

[Tiff Macklem, Governor, Bank of Canada]

Thank you, Mr. Chair.

Good morning, committee members.

I am very pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss our recent policy decision and the monetary policy report.

In January, we raised our policy interest rate by 25 basis points to 4.5%. We also said we expect to hold the policy rate at the current level, while we assess the impact of eight consecutive interest rate increases since March 2022. This is a conditional pause. It's conditional on economic developments evolving broadly in line with our forecast.

Since the last time we were with you, we've seen some evidence that our interest rate increases are starting to slow demand and rebalance our overheated economy. With inflation above 6%, we're still a long way from our 2% target. However, inflation is turning the corner. Monetary policy is working.

Before we take your questions, I’ll outline the impact our rate increases have had so far. Then I’ll explain what we expect to see this year. Finally, I will highlight some of the risks we face and how we will respond to ensure that inflation continues to come down and returns to our target.

Inflation in Canada has eased but remains high. Annual consumer price index, CPI, inflation moderated to 6.3% in December from its peak of 8.1% in June. So far, this easing mostly reflects lower prices for energy, particularly for gasoline.

With global supply chains improving and demand slowing here, at home, for big-ticket items that people often buy on credit, price increases for durable goods have also moderated. Prices for food and many services, however, are continuing to rise much too quickly. The Canadian economy remains overheated and clearly in excess demand, and this continues to put upward pressure on many domestic prices.

A broad range of labour market indicators have shown only modest signs of easing. Job vacancies have come down a little but remain elevated, the unemployment rate is near historical lows, and many businesses continue to report labour shortages.

Overall, the restrictive stance of monetary policy is helping to rebalance demand and supply. Household spending is slowing, particularly for goods sensitive to interest rates like housing and furniture. More broadly, consumption growth appears to have weakened considerably in the second half of 2022. Some of this slowdown reflects the waning boost from the reopening of the economy, but higher interest rates have contributed.

We know that it takes time for higher interest rates to work through the economy to slow demand and reduce inflation. That's why monetary policy needs to be forward looking. Guided by what we've seen so far and our outlook for economic growth and inflation, we think it's time to pause interest rate hikes and assess whether monetary policy is restrictive enough to return inflation to the 2% target.

If economic developments are broadly in line with our forecast and inflation comes down as predicted, we shouldn't need to raise interest rates further, but, if evidence begins to accumulate to show that inflation is not declining in line with our forecast, we are prepared to raise our policy rate further.

In our January outlook, we expected economic growth to be close to zero for the first three quarters of the year. With growth and demand stalled, supply will catch up, and the economy will move from excess demand to modest excess supply. This will relieve inflationary pressures.

We expect CPI inflation to fall to around 3% in the middle of this year and reach the 2% target in 2024. We've already seen a momentum shift in goods' prices. For inflation to get back to 2%, the effects of higher interest rates need to work through the economy and restrain spending enough for supply to catch up. The tightness in the labour market needs to ease, wage growth needs to moderate and service price inflation needs to cool. Inflation expectations will also need to come down, and businesses need to return to normal pricing behaviour.

If these things don't happen, inflation will get stuck above our 2% target, and additional monetary tightening will be required.

There are risks around our projection. Global energy prices could jump again, pushing inflation up around the world. Inflation expectations could remain elevated in Canada, or increases in labour costs could persist. Overall, we view the risks around our inflation forecast as balanced, but, with inflation still well above our target, we continue to be more concerned about upside risks.

I want to leave you with a few key messages.

The decline in inflation since the summer is welcome relief for many Canadians who are struggling to keep up with the rising cost of living, but, at more than 6%, inflation remains too high.

To fight inflation, the Bank of Canada responded forcefully, raising our policy interest rate from 0.25% a year ago to 4.5% today. That is working to reduce demand and rebalance the economy. We're still a long way from our inflation target, but recent developments have reinforced our confidence that inflation is coming down. We are committed to getting inflation all the way back to the 2% target so Canadians can once again count on low, stable, predictable inflation and sustainable economic growth.

With that overview, the senior deputy governor and I would be pleased to take your questions. Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor Macklem, for those opening remarks.

I know that members are eager to ask many questions.

In our first round, each party will have equal time of six minutes.

We're starting with the Conservatives.

MP Hallan, you have six minutes, please.

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

Thank you, Chair.

Thank you, Governor and Deputy Governor, for being here today.

Governor, in January's monitoring report, you indicated that upward pressure on prices stems from problems such as labour and difficulty sourcing goods such as building material or food, as you've highlighted today as well.

Would cancelling domestic policies such as the carbon tax, the escalator tax on excise duties and the luxury tax, which all have a negative impact on production, as we know, help to ease those supply issues?

[Tiff Macklem]

I guess I could say a few things on supply issues.

Many of the supply issues that have affected particularly goods' prices are global in nature. They have certainly been more intense and more persistent than we had expected, but I am pleased to report that they are working their way out. You can see in the monetary policy report a number of graphs that show shipping costs and delivery times. They are looking, maybe not quite normal yet, but much more normal than they've looked for some time.

The other aspect of that is that we've seen the demand for goods, largely with the increases in interest rates, especially larger goods, things like houses, furniture and appliances, which people often buy on credit.... Those are some of the first places you see higher interest rates feeding through the economy. They've been slowing, so with slower demand and better supply, you have seen goods' prices roll over.

With respect to your specific questions about taxes and carbon taxes, those are built into our projection. Yes, they have effects. Those are built into our projection.

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

Then would you agree that eliminating those domestic policies, like the carbon tax, would help to bring down the inflation?

[Tiff Macklem]

The increases in the carbon tax that have been announced are adding about 0.1% to inflation in each year of our forecast.

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

But we know it's still adding to it.

Would you agree that eliminating those domestic policies, including the excise tax, would help you to fight inflation?

[Tiff Macklem]

If the carbon tax was not increased, our estimates are that inflation in our forecast would be 0.1% lower in each year of our forecast.

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

It would be lower. Thank you.

Do you still believe, like you've said once before, that inflation in Canada reflects what's happening in Canada today?

[Tiff Macklem]

Yes, I think the initial run-up in inflation was mostly driven by global factors. There were much higher energy prices, as I just talked about, global supply chains were really gummed up, and we saw a big surge in demand globally for goods. All that drove goods price inflation up very rapidly.

This time last year, service price inflation was actually was still about 2% in Canada, but over the course of the last year, it rose very quickly. That largely reflected what's happening here in Canada. The economy overheated. Then we got through omicron. Last year at this time we were just coming out of omicron and the economy has never really looked back. Nobody could tell us how many waves of this there were going to be. Fortunately, that was the last major wave. The economy reopened. Businesses were not able to keep up with the demand and you saw domestic prices increase quite rapidly.

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

Just in that line, former Liberal finance minister John Manley recently was on record saying that the Prime Minister's fiscal policy is fuelling inflation rather than resisting it.

Would you agree that continued government spending at its current rate is working contrary to the Bank of Canada's attempts to address inflation?

[Tiff Macklem]

Parliamentarians, you have difficult decisions to take. Governments have many priorities. We take government spending as given. When Parliaments pass fiscal plans we build those into our projections. Those are built into the projections we have. We have inflation coming down to around 3% in the middle of this year.

What I will say is we are acutely aware that high inflation is hurting Canadians. Unfortunately, high inflation affects the more vulnerable members of society. They have smaller buffers. Much more of their spending is on necessities. They don't have the ability to cut back.

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

Absolutely. We know that as well.

Would you say that, if spending over the last few years by the government had been lower, interest rates would not have had to be raised to today's levels?

[Tiff Macklem]

You can do these counterfactuals. Obviously, the more government spending there is—it depends what the government spending is on—if it's government spending that's adding directly to demand, yes, other things equal, there will be more growth and in an overheated economy that will put more upward pressure on prices.

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

If the Liberal government continues to spend the way it is, going through even its own projections, will interest rates have to go up in your estimation?

[Tiff Macklem]

Certainly if demand in the economy continues to run ahead of supply in the economy and inflation does not come down in line with our projection, we've been very clear, that yes, monetary policy would likely need to be more restrictive. In other words, yes, we would have to raise interest rates further to get us [Inaudible—Editor].

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

Is there a risk that, at current levels, this is what you'll have to do?

[Tiff Macklem]

There are certainly upside risks to our forecast. If those materialize, then yes, we'll have to raise rates further.

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

Are you afraid that's it's because of government spending going up?

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Hallan. Time is up.

We're now moving over to the Liberals.

MP Baker, please, for six minutes.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thanks very much, Chair.

Thank you, Governor and Senior Deputy Governor, for being here.

I just wanted to pick up on what Mr. Hallan was asking. My understanding of what you said in your opening statement, Governor, was that your current projections are for inflation to continue to come down gradually over the course of the next year or so towards your 2% target and you don't foresee at the moment any further interest rate increases.

Did I understand that correctly?

[Tiff Macklem]

Yes.

Let me be clear. What we're saying is, we've raised rates rapidly, in fact, historically at a very rapid pace in taking it from a quarter of a per cent to 4.5% in 11 months. We are seeing the effects of monetary policy working, but we know that monetary policy works with a lag. The interest rate increases that we've already brought in will continue to feed through the economy.

Our assessment right now is that it's time to pause and assess whether we've raised interest rates enough. If inflation comes in line with our own forecast, then yes, we've probably done enough. There are certainly upside risks to that forecast. If we need to do more, we will.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Is it fair to say there are upside risks and downside risks to any forecast?

[Tiff Macklem]

Yes, there are upside and downside risks.

As we outline in the monetary policy report, we think that the risks around our inflation forecast are reasonably balanced, but I would underline that with inflation still over 6%, we are more concerned about those upside risks.

Canadians have been enduring high inflation for too long. We are acutely aware that their patience is running out. The anxiety of high inflation continues. Inflation has come down from over 8% to a little over 6%. It is really important that Canadians see that inflation keep coming down to restore their confidence that we are going to get back to price stability.