Evidence of meeting #15 for Industry, Science and Technology in the 39th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was dollar.
A recording is available from Parliament.
Senior Deputy Governor, Bank of Canada
It is the floating exchange rate that allows us to manage the Canadian economy according to our domestic situation.
Conservative
Conservative
Bruce Stanton Conservative Simcoe North, ON
Thank you, Mr. Chairman.
Welcome to our witnesses. It's great to hear an economic perspective from the highest order, I would say. It's very good.
There's one specific reference you made in your opening comments that I wanted to ask you about. In the closing line, you said that in line with the bank's outlook, further monetary stimulus is likely required in the near term. Could you give us some examples of what you mean by monetary stimulus? Can you give some examples of what that would be?
Senior Deputy Governor, Bank of Canada
To be quite direct, it would mean further declines in our policy interest rate. When we talk about monetary stimulus from that perspective, that's what we mean.
Conservative
Bruce Stanton Conservative Simcoe North, ON
If you were projecting ahead, that would mean that the outlook for the months ahead will see perhaps some downside for us.
Senior Deputy Governor, Bank of Canada
Exactly. The projection we present, as I noted earlier, with that weakness in the first half of the year we did lower our policy rate on December 4 and again on January 22, and what we're indicating here is the likely need for further monetary stimulus, which is the phrase we use, but it is our policy interest rate we're talking about.
Conservative
Bruce Stanton Conservative Simcoe North, ON
Back in the fall the Government of Canada released its fall economic statement that created, among other things, tax reductions and easing up, more or less, on the tax burden of Canadians. I wonder if you would have any comments on how those kinds of macro fiscal policies impact on things like the dollar and Canada's overall resilience when it's faced with these kinds of adjustments that in many cases are outside of the realm of our ability to control things like our exchange rate relative to the U.S.
Senior Deputy Governor, Bank of Canada
When we think about what I'll call fiscal policy, to look at it in the broader context, when we put together our projections for the Canadian economy, we basically take as given what we know about fiscal policy that has been announced either by the federal government or the provinces. We need to factor that into our thinking. So we don't have a judgment as to what fiscal policy should do in a particular way. Our job is very much at the macro level to try to include that in how we see everything else at play affecting the Canadian economy. That is very much how we approach it.
Conservative
Bruce Stanton Conservative Simcoe North, ON
More or less, you assess it based on what's been announced.
Conservative
Bruce Stanton Conservative Simcoe North, ON
Over the last several sessions, both on this topic and on others, as you can imagine, this committee has been paying close attention and watching some of the issues around job losses, as has been mentioned by other members. Certainly no one ever wants to see shrinkage in job rates here in Canada. Although the national rate of employment is as high as it has been for several decades, nevertheless there are pockets where there is some shifting going on.
We heard yesterday one of the witnesses who talked in terms of while there have been some losses, for example, in traditional industry like manufacturing, there have been gains on the other side with the service sector, and some of these newer jobs are in fact shifting to higher-paid, higher-quality jobs. Are these kinds of adjustment the normal thing to expect, given what Canada is faced with in the global economic framework?
Senior Deputy Governor, Bank of Canada
“Normal” is a difficult word to comment on.
What we're facing here in Canada is a series--I apologize for using a technical term--of relative price shocks. The best example of that is the increase in commodity prices. The issue really is how do we best adapt to these relative price shocks, these changes in the reality of the global economy that we're facing.
If you go back to the period around the Asian crisis in 1996-97, the world economy was very weak. Commodity prices were very low, and that was when our dollar dropped down. What we saw through that period was a major shift of resources, including employment into the manufacturing sector. We went through a period where manufacturing employment and production grew very rapidly. This is a bit of a generalization, but what we are going through now is the reverse of that. We've had a very strong global economy, high commodity prices, and our dollar has moved up in response to that. What we're seeing is a shift in resources now, including employment, into the resource sector, but we also have a very strong domestic economy--construction, services.
Your point is absolutely correct. When you look at the aggregate numbers in terms of employment, we've seen sustained high levels of employment, but we've had this difficult adjustment we've been going through. That's why I was emphasizing earlier, in my view, the absolute importance for all governments in this country to continue to work together and independently as required to continue to promote policies that facilitate flexibility and adaptability. These types of shocks aren't going to go away. It's the reality of what we have to face.
Conservative
NDP
Peggy Nash NDP Parkdale—High Park, ON
Thank you, Mr. Chair.
Welcome to the guests.
I would like to ask you about the rate of the dollar. I think you might have addressed this, but maybe you can clarify it for me. Does the Bank of Canada have a target it sets the dollar at, a target rate it pegs the dollar at? Is there a rate you would like the dollar to be situated at?
Senior Deputy Governor, Bank of Canada
No. We have a target for the rate of inflation, but we do not have a target for the exchange rate.
NDP
Peggy Nash NDP Parkdale—High Park, ON
Finance Minister Flaherty is quoted today in the paper as saying that the Bank of Canada has targeted a range of 95¢ to 98¢ or so for the dollar and that this remains the target of the Bank of Canada, which he supports. What do you think he could have meant by that, or where do you think the confusion comes from? Or was he just wrong?
Senior Deputy Governor, Bank of Canada
I certainly can't comment on the reported comments of the minister.
What we say in our policy report is that when you look at all the factors that have been influencing the Canadian economy, an exchange rate of around 98¢ is not inconsistent, in our view, with the fundamental factors at play. And indeed, when we put together our projection, which of course looks out through 2008 and 2009--
Senior Deputy Governor, Bank of Canada
We have to make certain assumptions about key prices, if you like, that go into this projection. As I noted earlier, in the case of energy prices we use the futures curve, which is the market's best view at any point in time. But that is an assumption. Given that assumption, we say this is the impact it will have on the consumer price index. Likewise, with the dollar, we make an assumption so that we can complete a coherent projection, if you like. In this monetary policy report update, which is an update to our projection, we assume a 98¢ exchange rate for the Canadian dollar.
I really can't comment beyond that.
NDP
Peggy Nash NDP Parkdale—High Park, ON
Okay, so that's maybe where he got that impression.
When you do this projection.... I just want to confirm your view as to why the dollar is projected to be so high. We've heard it's the U.S. economy and the reduction of the American dollar, but I note that the Canadian dollar seems to have gone up relatively more quickly than other currencies vis-à-vis the U.S. dollar.
So is it strictly the oil and gas sector and the commodity prices that are having that extra impact here in Canada?
Senior Deputy Governor, Bank of Canada
In fact the Canadian dollar has not been the only currency that has moved up. We actually have some charts that perhaps my colleagues can circulate.
NDP
Peggy Nash NDP Parkdale—High Park, ON
Other currencies have had the rate of increase of the Canadian dollar?
Senior Deputy Governor, Bank of Canada
Absolutely. The Australian dollar, the euro--all these currencies have moved up against the U.S. dollar more or less in a similar way to the Canadian dollar. You get variations, but by and large you'll see that from this chart. John can talk to that later.
I know time is short, Mr. Chairman, but I think this is an important point, so perhaps you'll let me talk a bit more about it.
As I noted earlier, we've been going through a very prolonged period of very strong global economic growth. We've had five years of rates of growth globally over 5%, almost unprecedented since World War II. With that, we've had this increase in commodity prices. When you look at movements in our exchange rate, one can't be precise, but a movement up to the low 90¢ range to around parity would not be inconsistent with the increase in our terms of trade, or commodity prices more generally. But there's a wide confidence band around that.
So we pay very close attention to the exchange rate relative to what we think makes sense. We think through very carefully the implications of the exchange rate and its movements for the Canadian economy.
To go back to your point, it's a very important price in the Canadian economy. It's something we pay very close attention to, particularly if it were to move outside a range that we would think is consistent with these historical relationships. That would be something we would clearly factor into our policy thinking.
Senior Deputy Governor, Bank of Canada
I apologize, Mr. Chair. All these answers are long.
