Finance Committee on April 18th, 2023

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Dzerowicz.

Now we'll go to the Bloc with MP Ste-Marie, please, for six minutes.

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

Thank you, Mr. Chair.

Governor, senior deputy governor, thank you for being with us today.

In your monetary policy report, I was surprised to see that you forecast gross domestic product growth of 1.4% for this year and 1.3% for 2024. Unless I am mistaken, this is real inflation-adjusted growth.

Why is the projected growth lower for 2024 than for 2023?

[Tiff Macklem]

It's a little bit due to the calculation of annual growth rates versus annualized quarterly growth. If you look at the latter, it's very weak for the rest of this year. It starts to increase next year, and it will be even stronger in 2025. When you calculate the annual average, it's about the same for both years. However, if you look at the quarterly dynamics, it is stronger in 2024.

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

Okay. Thank you, that shed some light for me.

How do your forecasts for economic conditions, growth, inflation, the job market, and so on, differ from those presented in the 2023 budget?

[Tiff Macklem]

You're talking about the federal budget. There isn't much difference. The survey used by the federal government's Department of Finance was done before we did our forecast. We have more recent data, which is higher, especially for the first quarter. Both forecasts suggest weak growth and a growth reduction. The growth forecast in the budget is still a little bit weaker than ours, but both are low.

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

Okay, thank you.

As you reminded us, the policy rate has been raised. On the bank side, are you seeing this increase in interest rates reflected in the compensation of savers? In your analysis, are the rates offered to savers at financial institutions accurately reflecting the increase in the policy rate?

In connection with this, do you think the competitive mechanism among banks is working well, or is it more like an oligopoly situation?

[Tiff Macklem]

To answer your first question, we did see that, when we raised the policy rate, it was reflected in banks' decisions. Mortgage rates are higher, and there is more competition in terms of deposits. Deposit rates are also going up. So some things may change faster or slower, but, generally speaking, it has had an effect.

We've established a system with a few large national banks, which are well known. We've also established a system with small to medium-sized banks, more regional banks that are competing to some degree with the big banks. Basically, I think Canada has found a good balance in our banking system, which is known for its stability, and that's good for all Canadians. That's in part due to us having a well-diversified national bank system, which helps manage the risk associated with lending.

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

Thank you.

How much time do I have left, Mr. Chair?

[The Chair, Liberal, Peter Fonseca]

You have about 15 seconds, MP Ste-Marie.

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

I will wait for my next turn, as my next questions will require answers that are too long.

Thank you.

[The Chair, Liberal, Peter Fonseca]

We're off to the NDP with MP Blaikie, please, for six minutes.

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

Thank you very much.

Back in the fall of 2021, there was some fanfare around a new mandate for the Bank of Canada. It seems to me that the bank still has a pretty hard-nosed focus on price stability or inflation control.

We've heard you say on many occasions that the unemployment rate is low and that expectations around wage growth are a factor in your deliberations around where to keep the general rate. Has the new mandate from the fall of 2021 changed any of the assumptions the bank works with? Has it changed its approach? Is its analysis substantially different in any way, given the new agreement signed in the fall of 2021? If so, in what ways would you say the new mandate has changed the way you've approached the scenario we have found ourselves in over the last two years, versus if you had used the mandate that was signed off on in or around 2016?

[Tiff Macklem]

There are two things there.

First of all, as to what's changed or hasn't changed, I think what hasn't changed is that since 1995, the inflation target has been 2%. I think the agreement in December 2021 was clearer about the role of the labour market in the formation of monetary policy. It was clear that our primary objective is low, stable inflation, and in pursuing that, we look at the labour market carefully. We want to support strong levels of employment. I would say that the agreement in December 2021 really was not a big change. It was more about continuity, and I think it did add some clarity.

With respect to what has changed—and this has been very important through the whole pandemic period—we have been putting more emphasis on the labour market. You asked what we can see that's changed. I think what you can see is that we are putting out much more analysis on the labour market. We are looking at the labour market at a much more disaggregated level. We're not just looking at the big aggregate statistics like the unemployment rate and the amount of employment. We're looking at it by different demographic groups—age, gender, high-income workers, low-income workers—and that is helping us get a better picture.

You talked about how it affects us right now. Right now we're looking at how higher interest rates are working their way through the economy to bring inflation down. Looking at the labour market at a more granular level is one way we can get a better picture of that, which should lead to better decisions.

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

In the fall of 2021, Pierre Poilievre was the finance critic, and he was very concerned that the Bank of Canada's principle policy focus should remain price stability and inflation control. In that sense, the government pretty much did what Mr. Poilievre was recommending at that time. Is that fair to say?

[Tiff Macklem]

Price stability remains absolutely essential. That is our primary objective.

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

One of the questions I have for you, when you're looking at that unemployment rate, is.... Again, we've heard you express concern that it remains low. Is there a target unemployment rate? Is there a scenario in which unemployment continues to be low and you foresee the bank nevertheless lowering interest rates, or is it important to the bank that unemployment reaches a level it's not currently at in order to trigger a reduction in the general rate?

[Tiff Macklem]

We're guided, really, by inflation and achieving our inflation mandate. It is important, when you're targeting inflation—because there are lags in the effects of monetary policy—to look forward, not only to where inflation is but also to where you think it's going. That's where the labour market becomes particularly important. Inflation has come down from 8% last summer to 4.3% today, and the labour market has remained very strong.

Our own forecast is that growth is going to be weak through the rest of this year, and to be frank, we need weak growth. We still have demand running ahead of supply in the economy. We still have a lot of upward pressure on service prices. If we're going to get inflation back to 2%, we need to relieve those pressures, so we actually need this period of slower growth to let supply catch up.

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

Would you say weak growth implies higher unemployment?

[Tiff Macklem]

Yes, and that's just what I was getting to.

We don't publish a forecast on unemployment, but it probably means the unemployment rate will need to move up. We're not talking about large increases in unemployment.

To get back to one of the earlier questions, we have positive growth—

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

I am sorry to interrupt, but before my time runs out, I want to explore one consequence of that.

Without effective automatic stabilizers like a well-functioning employment insurance system.... If we're likely going to see the rate of unemployment go up and if that's a direct or indirect policy goal of the bank, how important is it to have effective automatic stabilizers, both from a macro point of view in respect of the economy and for individual Canadian households so they have some kind of income replacement in the face of unemployment?

[The Chair, Liberal, Peter Fonseca]

I'd like a very short answer.

[Tiff Macklem]

Just to be clear, we take no pleasure in increasing the unemployment rate. We have difficult decisions to take. There is real value in restoring price stability. I'm going to leave issues of fiscal policy to government and parliamentarians.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Blaikie.

Now we'll go to our second round. We're starting with MP Chambers, for five minutes, please.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

Thank you, Governor, and thank you, Senior Deputy Governor. It's always a pleasure to have you here. Thank you for accepting our invitation, although I know that you often come under your own volition. You've come here at least half a dozen times, probably, in a couple of years. Unfortunately, the executive branch and the Minister of Finance have not accepted our invitation. We greatly appreciate your willingness to be transparent with parliamentarians.

I want to talk a bit about real estate, if I may. I don't know if that's Ms. Rogers's portfolio. Was the bank consulted on the government and OSFI's decision to allow lenders to extend amortization periods during refinancing?