Evidence of meeting #12 for Finance in the 45th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was economy.
A video is available from Parliament.
Liberal
Kent MacDonald Liberal Cardigan, PE
Thank you, Madam Chair.
Thank you to the governor and the deputy governor for attending today.
Governor, yesterday we introduced a budget to invest in Canadians. We're doing this because of the storm we're in. We're investing a trillion dollars. Do you think that's going to improve productivity and the standard of living for Canadians over the next few years?
Governor, Bank of Canada
Actually, the senior deputy governor touched on this.
I haven't read every page in the budget, but I certainly have looked at it. The way I would put it is that we would largely share the diagnosis of the issues the budget identifies. We've had weak business investment in this country for many years. The impact of tariffs, particularly the impact of the unpredictability of U.S. policy, and the upcoming review CUSMA, those things are all weighing on investment, so investment is even weaker.
This country needs more investment to improve productivity, open new markets and grow our internal market. That involves public investment but also, importantly, catalyzing private investment. We need to do a better job of attracting. We need to keep more of the capital. We need more investment by Canadian businesses in Canada, and we need to do a better job of attracting foreign capital.
I think we see the same diagnostic. There are a number of measures in the budget on the tax side and on the spending side. It's not really up to us to opine on the specific measures in the budget. I will say that fiscal policy can do some important things monetary policy can't do. Fiscal policy can target specific sectors in a way monetary policy can't. We have a number of sectors that have been very hard hit. Fiscal policy can support them directly, and fiscal policy can use the tax system and the spending system to spur investment.
What's going to be important moving forward is the quality of those investments, the quality of that spending and the timely and sound execution. That's not the responsibility of the Bank of Canada, but it is the responsibility of parliamentarians.
Liberal
Kent MacDonald Liberal Cardigan, PE
Thank you.
Further to that, we'll talk about monetary policy. The two of you gave a report last week. The overnight rate dropped another 25 basis points. I come from the business world, and every time interest rates go down, that's an incentive to invest in technology and in improvements in your operation.
You commented earlier that you felt there will be a stable rate going into 2026. There may be no more changes over that year in your monetary policy report. Is that going to give investors confidence, to have a stable environment on interest rates?
Governor, Bank of Canada
Our policy rate is at 2.25%. If you look at the 10-year Government of Canada rate, which is the benchmark that loans to companies are priced off, it's at three and a quarter. Interest rates are not super low, but they're certainly at the short end. We think we're at the lower end of what we call “neutral”. It is providing some stimulus.
Yes, there is a role for monetary policy to play in helping with this structural adjustment. Lowering interest rates to lower the cost of investment is part of that. As we stressed in the monetary policy report, unfortunately, structural adjustment also brings new costs. Tariffs bring new costs. We are limited in how much we can use interest rates to do that. What we indicated in our report is that—and I will emphasize this—conditional on the forecast we laid out, yes, we think the current interest rate is about right to balance those two things.
Senior Deputy Governor, Bank of Canada
I would stress that the thing we think about in terms of contributing to confidence for investment is keeping inflation stable. Interest rates are how we do that. What businesses need from us, from the Bank of Canada, number one, is to be confident the prices are going to stay stable.
Liberal
The Chair Liberal Karina Gould
Thank you, Mr. MacDonald.
Mr. Garon, you have the floor for two and a half minutes.
Bloc
Jean-Denis Garon Bloc Mirabel, QC
Thank you, Madam Chair.
We have a government that's been unable to make deals with Mr. Trump like other countries have. When they're unable to do so, the Liberals tell us that it's no big deal, because on average, the tariffs in Canada are much lower than those of our trading partners. The next day, however, they tell us that it's urgent that we diversify our trading partners, because our trade with the United States represents a significant portion of our GDP and we're extremely vulnerable. We don't know which of those two arguments stands anymore.
For example, on page 31 of the report, you tell us that the average tariff is 5.9%. It seems to me that this is a poor measure of our vulnerability. In terms of the tariffs, the sectors affected and our volume of trade with the United States, compared to our major trading partners, are we more or less affected by this crisis in the current context?
Governor, Bank of Canada
Both of the things you said are true. The tariffs the U.S. is imposing on Canada are about 6%, on average. The reality is that there are very high tariffs affecting a few sectors, whereas there are almost none in the rest of the economy—
Bloc
Jean-Denis Garon Bloc Mirabel, QC
I'm going to interrupt, if I may, because I only have a minute left.
The question is, at the end of the day, are we more affected or at greater risk than our partners?
Governor, Bank of Canada
Let me finish. As I mentioned, the average tariff in Canada is among the lowest in the world, but our economy is much more integrated with the United States than any other economy in the world.
So, yes, we are at greater risk, and Canada is much more affected by U.S. tariffs than a number of other economies.
Bloc
Jean-Denis Garon Bloc Mirabel, QC
When the public hears that Canada doesn't urgently need to make a deal and that it's no big deal because, ultimately, the average tariff in Canada is very low, it can be misleading, whether or not it's intended to be.
Governor, Bank of Canada
I agree that, for the Canadian economy, it's very important that there be less uncertainty.
Liberal
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
Thank you.
Governor, in response to one of my colleague's questions, you said that if we don't do something about productivity, we're on a structural path to ever-lower standards of living. Canadians' standard of living is what's at stake in the productivity crisis that was a break-glass emergency even before the tariff war began.
What are some of the things we need to do in order to do something about it? Would repeal of excessive regulation be on the list of things that must be done to solve the productivity crisis?
Governor, Bank of Canada
I'm just going to clarify one thing I said and then ask the senior deputy to respond since she's been leading the charge on productivity.
Just to be clear on what I said about the standard of living.... I didn't say that the standard of living is going to be ever lower. The economy is going to get back to growth. The standard of living of Canadians is going to improve. Without tariffs, it was up here. Unfortunately, we're now on a lower path. In the monetary policy report, our estimate is that this path is about 1.5% lower. That's material.
However, let me ask the senior deputy governor to talk about some of the things we could do to bend that lower curve back up to the higher path.
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
Okay...because it was the deputy governor's concern. She called it a break-glass emergency before the tariff war began.
Go ahead.
Senior Deputy Governor, Bank of Canada
In terms of what could we do, the point that you made is a good one. We could look at our regulatory environment. You want to be careful when you remove regulations. Usually they're there for a reason, but they certainly can always be reviewed and made efficient.
If I was going to focus on regulation in Canada, one of the things I think we could do is look at where regulations differ across provinces for unclear reasons. Certainly, standardizing regulation, making it easier to comply with the regulation, would be one step.
Another would be steps to encourage investment, as the governor mentioned earlier, whether those are in tax rules or in just generally making the country more investable.
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
In the report you delivered, you singled out.... Actually, you spoke about energy and aerospace. Those were two industries you mentioned that are high-productivity industries. Oil and gas is one where we've seen a flight of capital and a lack of investment, a lack of pipeline capacity.
Would building pipelines add to the productivity of our economy by enabling us to have the means to transmit that resource?
Senior Deputy Governor, Bank of Canada
Investments to get our resources to market, in general, will add to productivity.
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
Okay. Pipelines, ports and even other transportation infrastructure...?
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
Okay.
The government has as much as admitted that their regulatory environment is preventing these things from being built. That was why they brought in Bill C-5, to get over their own regulations that they brought in.
Regulation—is that at the core of why we cannot attract investment to high-productivity industries such as the oil and gas industry?
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
Okay. Thank you.
On interest rates, Governor, you said CPI was at 2.4% and core inflation was at 3%. These numbers are getting into the higher end of your bound, yet the bank has dropped interest rates. If you're at the higher end of the bound but dropping interest rates, is that out of concern for the productivity concerns and the economic prospects rather than...? I'll let you....
Governor, Bank of Canada
You're right. Our target is for total CPI inflation.... Total CPI inflation has been pretty close to 2%. It did go up a bit in September, to 2.4%. However, you're right, our preferred measures of core are about 3%. When we look at a broad range of inflation indicators, we think underlying inflation is about 2.5%, so yes, that is a bit of a concern.
Our concern level, though, has been coming down. If you look at three-month rates of core inflation, which is a little more timely than looking at the year over year, what you see is that, in the first quarter, they were running about 3.5%. They are now under 3%. Some of that upward pressure we saw on underlying inflation is dissipating.
We need to see it come down further, and that is built into the forecast that we published. If that doesn't happen, if instead of.... We have core inflation coming down to total around 2%, but if inflation was to actually move up to 3% where our core is, we would be off our forecast. That would get our attention. That's the sort of thing we would respond to.