Industry Committee on Jan. 30th, 2008

[Robert Vincent, Bloc, Shefford, QC]

Let us suppose you are unable to control the rise of the dollar because of the price of natural resources such as gas and oil, etc. How can you come up with a projection without knowing for how much a barrel of oil will sell the next day, which is a factor that could boost the value of the dollar?

You say that the way to solve this problem is to lower interest rates. But if we lower interest rates too much, we could be faced with a recession.

What are your projections at the present time in order to bring the dollar down to 85¢US? How are you going to achieve this?

[Paul Jenkins]

We use the history of the variations of the dollar and the relationships between the factors that cause them.

As I mentioned, after the Asian crisis, when commodity prices dropped, the dollar dropped. More recently, with a very strong global economy and the increase in commodity prices, the value of the dollar increased.

The dollar reflects all the components of the Canadian and American economies. Its value is relative. We must determine which factors cause the movements of the dollar and our monetary policy response will depend on what those reasons are.

[Robert Vincent, Bloc, Shefford, QC]

I understand that, but you are using your previous experience to make your projections. But today, we are in an economy that is becoming globalized and we therefore cannot rely on what happened before.

We have been exporting and we still export some 80 percent of our manufacturing production to the United States. Due to globalization, we cannot control our dollar because of the influence of China which determines itself the value of its currency. We are unable to counterbalance the volume of China's exports to our market.

The main question I am asking myself is this: what do we do if the price of fuel and gas increases, if the value of the dollar increases and we are no longer competitive? The Americans will no longer buy our products if our dollar is worth US$1.10. They will buy elsewhere, on other international markets. What will we do then? Will we sink into recession?

[Paul Jenkins]

No. According to the scenario you outlined, if the rate of the dollar increases due to the demand for commodities from emerging countries, the appreciation of the dollar will have a negative impact on other sectors of the Canadian economy.

[Robert Vincent, Bloc, Shefford, QC]

Especially the manufacturing sector.

[Paul Jenkins]

Yes. But at the same time resources from the manufacturing sector will transfer to the natural resources sector in order to meet the increased demand for the products of that sector. There are adjustments and movements of resources from one sector to another.

The challenge for the Bank of Canada is to create for the whole economy a balance between overall demand and supply. That is the challenge. It is clear that there will be periods when one sector will be stronger than another.

[The Chair, Conservative, James Rajotte]

Sorry, the time is up.

[Paul Jenkins]

It was a good question, but the answer will have to wait.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Carrie.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair.

I come from Oshawa, and we have a huge manufacturing sector.

[Paul Jenkins]

I come from St. Catharines.

[Colin Carrie, Conservative, Oshawa, ON]

There you go--another GM town.

I hear a lot from my constituents about the doom and gloom with this high dollar. I am wondering if you could let the committee know who is benefiting from a high dollar in our economy and what the benefits are.

[Paul Jenkins]

The answer is in why the dollar is high. The dollar has moved up because with the demand for a big part of the products we produce and sell internationally the price has gone up. That's a natural response in a market economy. That movement of the dollar is helping us maintain overall balance in the Canadian economy.

To go back to one of the earlier questions, in the absence of that movement upward we would be facing very intense inflationary pressures. There is no question about it.

You have to think about how that movement in the dollar, from a macroeconomic perspective, helps to keep the overall economy in balance and through that keeps inflation low, stable, and predictable. We do not want to go back to the 1970s and 1980s, when we made mistakes. We had boom-and-bust periods and high inflation and interest rates at double digits. Our objective is to keep that balance between supply and demand in order to keep inflation low and stable. That is our main contribution.

How that exchange rate movement affects different sectors of the economy does have positive and negative effects, of course. We're very well aware of that. But from a macroeconomic point of view, in the absence of that movement we would be in a significantly worse situation.

[Colin Carrie, Conservative, Oshawa, ON]

I think it's obvious that the government really respects the independence of the bank, but I've heard different politicians across the nation say that the government should be intervening with the bank and perhaps lowering rates even further.

What do you think of comments like that, and what would be the effect if the government started to do something like that?

[Paul Jenkins]

The important point here is that monetary policy does operate with long and--as Milton Friedman said--variable lags. With monetary policy you have to look ahead, as far as the trends that are at play in the Canadian economy. You have to look out one to two years in terms of the actions you take today influencing the economy through that period. That's why it's critically important for us to have a view as to all the factors that are at play influencing the Canadian economy, not just today but over the medium term. So in taking monetary policy decisions, one needs to have that medium-term perspective.

I believe the framework we have in place has served the Canadian economy very well. Our explicit inflation target, which is a joint agreement with the government, has served Canada very well in maintaining a macroeconomic framework that has given us an economic performance over the last 15 years plus that really stands out when you look around the world.

[Colin Carrie, Conservative, Oshawa, ON]

I'm curious whether you in the bank look at statistics or if you could provide the committee with an estimate of the number of people who have migrated from eastern and central Canada to western Canada because of the dollar--things along those lines--and the trade changes.

[Paul Jenkins]

Those numbers are available. Statistics Canada actually calculates migration numbers from one region to another. We don't have those with us, but we can certainly provide them to the committee. This comes back to the theme of flexibility and adaptability in the Canadian economy. Certainly when you look at the numbers over the last year or so, you see a significant movement of labour and resources to the west.

Those numbers are available, and we'll get them for you.

[Colin Carrie, Conservative, Oshawa, ON]

Thanks very much.

[The Chair, Conservative, James Rajotte]

Ladies and gentlemen, we're at the end of our hour. I see there are a number of questions from members who have not had a chance to ask them.

To the witnesses, would it be fair to invite you back in the next week or so?

[Paul Jenkins]

We would be happy to come back. I don't know whether next week will work, but this is important, so we would certainly be happy to make ourselves available to the committee.

[The Chair, Conservative, James Rajotte]

We could go around the room and put some questions on the table. Either option is fine with me.

Would members rather have the witnesses come back?

[Raymond Simard, Liberal, Saint Boniface, MB]

Yes, I think so.

[The Chair, Conservative, James Rajotte]

Mr. Brison has a very small question, but he is two members down. If I let him put a question I'll have to let the New Democrat, the Liberal, Conservative.... I'm just trying to be fair to all members.

[Scott Brison, Liberal, Kings—Hants, NS]

I'm sure the New Democrats are as interested in my question--

[Peggy Nash, NDP, Parkdale—High Park, ON]

As you are in mine?