Finance Committee on Feb. 16th, 2023

[Tiff Macklem]

These are not really monetary policy issues, but as you pointed out, the new U.S. law has changed the game with respect to competition.

I know that governments around the world, in Europe and in Canada are watching the impact this change in the United States is having on their country. It may affect how businesses make investments. It may lead them to invest elsewhere. So every country should be monitoring this. We need to see what impact it will have on our country and think about what we need to do.

In Canada, we have a carbon tax in place. We also have

“carbon capture and storage”. There are tax incentives to make that more attractive.

Different countries have different strategies, and it's important to look at what's similar or different about them.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much.

As you said, it's important to be there for the most vulnerable Canadians. For our government, it's really important to be there for Canadians when they need it most. That being said, we also have to make sure that as we help Canadians, we don't leave them worse off due to interest rates.

You talked about funding certain programs. We recently announced investments in the provincial health care systems. I note that this is not something that will help increase demand. That's now well defined.

Is that kind of spending good for our economy, and won't it necessarily lead to inflation?

[Tiff Macklem]

You have some tough decisions to make. Health care is a key issue for everyone. Costs are rising, and people are aging. There are demands on health care. The government has many priorities, and it's a balancing act. You'll have to decide what the highest priority is and invest money based on that.

That is your role, and it's a difficult one. We have a difficult role to play as well, and we're focused on ours.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much.

When you were talking about the International Monetary Fund (IMF) in the recommendations to governments, it was all about being there to help the most vulnerable, but in a targeted and temporary way. The government targeted health care precisely to help the most vulnerable Canadians.

Can you tell us more about that?

[The Chair, Liberal, Peter Fonseca]

Give a short answer, please.

[Tiff Macklem]

I don't have much more to say.

It's important to strike a balance and protect the most vulnerable. Inflation has serious effects on the most vulnerable. It's important to protect them but you don't want to add too much fiscal stimulus, because that would undermine efforts to reduce inflation. The solution is really to reduce inflation.

[The Chair, Liberal, Peter Fonseca]

Merci, MP Chatel.

Members, Governor, Senior Deputy Governor, you've been very efficient and you've answered many questions so we have enough time for a third round, members, if we stick to time.

The Conservatives start off with MP Morantz.

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

Governor, I want to follow up with you on a series of articles that have been written by Mark Rendell at The Globe and Mail, which I'm sure you're familiar with, where he talks about the fact that traditionally the bank has contributed its earnings to the federal treasury on an annual basis by remitting an amount, and most recently, over the last number of years, it's been about $1 billion a year. You've got this odd situation now where you've got billions of dollars sitting in the settlement accounts and you're now paying your overnight rate of 4.5% to the banks that were only earning 1% on the bonds you purchased from them before. Essentially, the bank, for the first time in its history is now in a loss position. Since we last spoke, you've now gone and made an arrangement with the Minister of Finance that she's going to allow you to keep your retained earnings.

Would you agree that, essentially, this arrangement amounts to Canadian taxpayers bailing out the Bank of Canada because of its quantitative easing program?

[Tiff Macklem]

I'm going to say a couple of things. Then I'm going to ask the senior deputy governor to respond to this very important question.

The first thing I want to highlight is that the Bank of Canada does not run monetary policy with a profit motive and whether we make gains or losses has no implications for the operations of the Bank of Canada or for our pursuit of our monetary policy or financial stability goals.

The second point, as you indicated, is that the Minister of Finance has indicated to us that we can, basically, retain future gains to offset the losses. Every major central bank has engaged with QE; we're all faced with a similar situation. In fact, Canada's balance sheet as a portion of GDP is smaller than most. This is a good solution and I'm going to ask the senior deputy governor to say a few words about just the mechanics of it and respond directly to your question.

[Carolyn Rogers]

The cash flow, or the mechanics of how this will work, as you describe is an odd situation; it's also a temporary situation. In normal operations in a normal year, the bank would return about a billion dollars to government or to taxpayers, as you've described it, for a brief period of time until we run off the settlement balances. We're already down to about half, so we expect that will continue to go down, but for that brief period of time, we will run a loss and we won't be returning that normal dividend to taxpayers—

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

I only have a limited amount of time.

[Carolyn Rogers]

Go ahead.

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

How much longer do you think it will take to reduce those balances in the settlement accounts to the point that you'll be in the black?

[Carolyn Rogers]

Well, we are about at half of where we were at peak. It depends to a certain degree on the path of interest rates, but—

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

Thank you.

Governor, earlier you seemed to indicate that you were uncomfortable talking about fiscal policy. You said you were going to leave that to the politicians.

Economists have written about this. There is a nexus between monetary and fiscal policy that can't just be ignored by a governor of a central bank. Economists like Neil Wallace and Thomas Sargent have written about this. I'm sure you're familiar with their writings. In fact, they've said that fiscal backup is necessary for monetary tightening to essentially be effective.

I'm wondering whether you're concerned. Firstly, a budget is coming up. Does it keep you up at night that the government may blow the bank again and increase spending dramatically and throw all your estimates out the window?

[Tiff Macklem]

First of all, we're not ignoring fiscal policy. However, fiscal policy is your job; monetary policy is our job. We take into account fiscal decisions and build them into our forecast.

Secondly, with respect to what the government will do...we put out our projection. We built in what they announced. We highlighted a number of risks around our projection. That was not a risk that we highlighted, because we think that governments will—

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

I guess I'm just wondering—

[Tiff Macklem]

I'll put it this way: Everything I've heard from this government is that they do not want to work at cross-purposes with monetary policy. That's certainly in the statements they've made.

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

We can only hope that's the case.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Now we're moving to the Liberals and MP Naqvi, please, for five minutes.

Welcome to the committee.

[Yasir Naqvi, Liberal, Ottawa Centre, ON]

Thank you very much, Chair.

Thank you, Governor and Deputy Governor, for being here. Thank you for your stamina to endure all of these questions.

I'm going to put my politician hat on.

Many politicians knock on doors often, as I do in my community. This is top of mind: cost-of-living issues, raises in interest rates. People are regularly talking about these things. The conversation we are having is an important conversation in terms of technical details, but it's really out of grasp for regular Canadians.

I want to ask you very directly, in plain language, when people are asking us the state of affairs when it comes to cost of living, making ends meet, paying for things, mortgage payments, what's the message we can deliver to them that they will understand about the future—about things to come—so that we can reassure them things will maybe get better?

[Tiff Macklem]

There are a few key messages.

The first message is that inflation is coming down. It probably peaked last summer. It was over 8% and it's now a little over 6%. It's coming down. We are very aware that 6% is still too high. Six is better than eight, but 6% is still too high. We are acutely aware that Canadians continue to be harmed by high inflation.

The second message is that the Bank of Canada has responded forcefully. We have raised interest rates rapidly. It's working. It is starting to rebalance the economy. Inflation is starting to come down. Over the course of the next number of months, we expect to see inflation come down considerably, so that by around the middle of this year inflation will be around 3%.

The third message is that at the Bank of Canada, we are committed to getting inflation all the way back to 2%, so that Canadians can count on low, stable and predictable inflation in the future.

[Yasir Naqvi, Liberal, Ottawa Centre, ON]

As a quick follow-up, when people hear about a recession, the anxiety level goes up because the past experience around recessions is job losses, etc.

We continue to hear about a mild recession, a soft landing. Again, in plain language, what does that really mean for Canadians?

[Tiff Macklem]

You're right. A recession is a.... Economists use it as a technical word, but for most people, it's a much more emotive word. You say “recession” and they think big job losses...very, very painful.

We are expecting growth to be around zero. That does mean that we could have two or three quarters of a small negative growth, so technically economists would call that a recession. It would be a mild recession.

It's not going to feel great, but it's not going to feel like what people think of when you say the word “recession”. We are not expecting large job losses or a very large increase in unemployment. Five per cent unemployment is probably not sustainable. To get the labour market in better balance and get inflation down, the labour market is just too tight. It does need to get better balanced. That does mean that the unemployment is going to go up a bit to get that balance, but this is still going to be a pretty healthy labour market. This is not going to feel like the kinds of recessions that we had in 2008, 1981 or 1991.

[Yasir Naqvi, Liberal, Ottawa Centre, ON]

Thank you.

Chair, I'll be sharing my remaining time with Mr. Baker.