Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 1 - Evidence
Ottawa, Tuesday, March 19, 1996
[English]
The Standing Senate Committee on Banking, Trade and Commerce met this day, at 10:00 a.m., to organize the activities of the committee.
Mr. Paul Benoit, Clerk of the Committee: Honourable senators, I would like to call the meeting to order. As clerk of your committee, it is my duty to preside over the election of the chairman, and I am ready to receive motions to that effect.
Senator Angus: I move that Senator Kirby become chairman of this esteemed committee.
Senator Kolber: I second the motion.
Mr. Benoit: It is moved by Senator Angus, seconded by Senator Kolber, that Senator Kirby be chairman. Is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
Mr. Benoit: Carried.
I invite the Honourable Senator Kirby to take the chair.
Hon. Michael Kirby (Chairman) in the Chair.
The Chairman: The only thing remarkable about this process is that in the maritimes we do not usually allow things such as this to come to a vote in case they turn out incorrectly.
The next item on the agenda, honourable senators, is that we need a motion for deputy chairman.
Senator St. Germain: I move that Senator Angus be deputy chairman.
Senator Perrault: I second the motion.
The Chairman: Is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
The Chairman: Carried.
Senators, there are two or three technical motions that we must attend to today. One is a motion that 600 copies of the proceedings be printed for distribution. This is a standard motion, but could someone tell me where that figure of 600 comes from? I have been in the Senate for ten years, and that figure has always been 600.
Mr. Benoit: The number varies from 500 to 600. In our case, given that we have more meetings and quite a demand, about 260 go to various libraries across the country and to the Canada Communication Group. Over and above that, we have a mailing list of about 150 people with whom we keep in constant communication. We send out a survey.
The Chairman: The figure of 600, therefore, is not an arbitrary number.
Mr. Benoit: It is not grossly exaggerated. We keep about 150 on the counter for people requesting issues.
The Chairman: With respect to various reports and things, do we know how many copies are actually requested and mailed out?
Mr. Benoit: We know that the basic figure is around 400, but it would vary.
The Chairman: The report on Confederation Life was a couple of thousand.
Can I have a motion with respect to item 5, that 600 copies of the proceedings be printed for distribution?
Senator Angus: I so move.
The Chairman: Is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
The Chairman: Carried.
I missed item 4 on the agenda. It relates to the Sub-Committee on Agenda and Procedure, the steering committee, and reads as follows:
That the Subcommittee on Agenda and Procedure be composed of the Chairman, the Deputy Chairman and one other member of the committee to be designated after consultation;
That, on matters of agenda and procedure, the Subcommittee be empowered to make decisions on behalf of the Committee
That the Subcommittee be empowered to invite witnesses and schedule hearings; and
That the Subcommittee report its decisions to the Committee.
Although there is no real precedent for the steering committee of this committee to deal with any significant issues other than the scheduling of meetings, could I have a motion to that effect?
Senator Angus: I so move.
The Chairman: Is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
The Chairman: Carried.
Item number 6 relates to meetings without a quorum. Could I have a motion to the effect:
That, pursuant it rule 89, the chairman be authorized to hold meetings and to receive and authorize the printing of evidence when a quorum is not present?
Senator St. Germain: I so move.
The Chairman: Is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
The Chairman: Carried.
Could I have a motion that, pursuant to rule 104, the committee is required to report on its expenses incurred in the preceding session? A list of expenses are attached. They are $10,760.20.
Mr. Benoit: That figure represents what we spent in the last two years plus another $10,000 which came out of the committee's branch for witnesses' expenses.
Senator Angus: What was the budget?
Mr. Benoit: We budgeted quite a bit more because at that time we had the whole corporate governance budget. However, that is not reflected in those figures. This budget is up until February 2 of this year. Those are the expenses.
The Chairman: If you take into account that we handle somewhere between 33 per cent and 40 per cent of legislation and that we have more meetings than any other committee, our budget is incredibly low in relation to other committees.
That is just an observation. One of the reasons is that, with the exception of the corporate governance hearings, we have always held our meetings in Ottawa because most of our witnesses can afford to come here.
May I have a motion on item number 7 please, which is to report expenses incurred by the committee in the last session?
Senator Simard: So moved.
Hon. Senators: Agreed.
The Chairman: Carried.
The next item is that we ask the Library of Parliament to assign a research officer to the committee and that the chairman, on behalf of the committee, direct the research staff in the preparation of studies. I am happy to have someone move that motion, provided it is clearly understood the research officer will be Gerry Goldstein. This is a generic motion, but it is also designed to make sure he stays. I want to make sure he does not let himself off the hook. May I have that motion from someone?
Senator Angus: I so move, with enthusiasm.
The Chairman: Good. The minutes will record that. The next item is that pursuant to section 32 of the Financial Administration Act, authority to commit funds be conferred on the chairman or, in his absence, the deputy chairman. Again, parenthetically, we have always done that jointly. It has never been by one person. As well, that item says that pursuant to section 34 of the Financial Administration Act and guideline 3:05 of Appendix II of the Rules of the Senate, authority for certifying accounts payable by the committee be conferred on the chairman, the deputy chairman and the clerk of the committee. It is an administrative procedure. Could I have a motion to that effect?
Senator St. Germain: I so move.
The Chairman: The next item is that, pursuant to Senate guidelines for witnesses, the committee may reimburse reasonable travelling and living expenses for no more than two witnesses from any one organization and that payment will take place upon application. That is a standard motion. Let me emphasize again that for all the years I have been a member of this committee, the decision as to what witnesses will be invited to appear and whether or not we will pay their expenses has always been made by the chairman and deputy chairman. It is essentially a committee decision delegated to the steering committee.
Senator Angus: Is there a budget for it?
The Chairman: I believe there is not. Allow me to give you an example. When we have considered a particular set of hearings, we then introduced a motion in the budget to get approval through Internal Economy.
Mr. Gerry Goldstein, Research Officer, Library of Parliament: It comes out of the Senate budget, not from the committee.
Mr. Benoit: Witnesses' expenses used to come out of the Committees Branch budget. This year they are asking individual committees to put forth a budget. What has been, up until now, two different sets of bookkeeping will be integrated into one, so we will have to make an estimate of how much will be required. On the basis of the last few years, we can determine how much to spend on witnesses' expenses.
Senator Angus: If we were then going to exceed that estimate, we would have to go back? I am thinking of a case. Last year we discussed bringing a witness from the U.K. That would be an expense.
The Chairman: During the Confederation Life hearings, we paid the expenses for several senior citizens to appear. What occurred there was that the steering committee, which consisted of Senator Poitras and myself at the time, went through the long list of witnesses that we had and decided that the business representatives could afford to pay for themselves. However, we wanted to get the views of people who had annuities, pensions and so on with Confederation Life, so we paid for some of them to come from Toronto and Vancouver.
Mr. Goldstein: At that time, it was not the committee which was paying. The Senate paid a standard rate for witnesses. They have now changed the procedure.
The Chairman: So do we have that motion?
Senator Angus: I so move.
The Chairman: The time slot for the regular meeting has historically been on Tuesdays from 10:00 to 12:30, and on Thursdays from 11:00 to 2:00. That stays and this room stays.
Mr. Benoit: For the immediate future.
The Chairman: This room matters because it is a good television room, which is important. Next week we will be hearing from the Governor of the Bank of Canada, and some of the committee rooms do not facilitate television.
That completes the list of motions for the purposes of organization. I want to go on to some other business and then come back to a particular item.
Senator Angus: I have one item of other business. I simply want to welcome the new member. It is Gerry St. Germain, who lives up to the Gerry principle.
The Chairman: This committee used to be dominated by maritimers. Now, with Senators St. Germain, Perrault and Austin, we have shifted that domination from one end of the country to the other. The only good thing about that is that for those of us who are not from central Canada, we have not stopped in the middle, so that it is still dominated by the extremes.
Senator St. Germain: Which is excellent. Thank you very much. I am honoured to be here.
The committee continued in camera.
Ottawa, Tuesday, March 26, 1996
The Standing Senate Committee on Banking, Trade and Commerce met this day, at 10:00 a.m., to continue its examination on the state of the financial system in Canada.
Senator Michael Kirby (Chairman) in the Chair.
The Chairman: Senators, this is our annual meeting with the Governor of the Bank of Canada to talk about macro-economic policy. As usual, we have scheduled this meeting to follow the budget.
Governor, we appreciate you taking the time to be with us this morning. Since this is our third annual meeting with you, you are used to the format in which you begin with an opening statement and we then have a policy discussion on a variety of topics that I know the senators wish to raise with you. For the record, perhaps you would introduce your colleague Mr. Jenkins.
Mr. Gordon G. Thiessen, Governor, Bank of Canada: Thank you very much, Mr. Chairman. My colleague is Paul Jenkins, Deputy Governor in charge of economic analysis at the Bank of Canada.
We are pleased to appear before you again this year to explain the Bank of Canada's monetary policy and to give you our assessment of current economic and financial conditions. The recent release of our annual report provides a good occasion for us to present an account of our management of monetary policy.
[Translation]
Let me begin with our monetary policy objectives. The agreement between the Government of Canada and the Bank of Canada is to hold inflation within a target range of 1per cent to 3 per cent from the end of 1995 through to the end of 1998. By then, the government and the bank are committed to deciding on a future target range that will be consistent with price stability.
[English]
I cannot emphasize too often, senators, that price stability is a means to an end, not an end in itself. Price stability is the appropriate objective for monetary policy because it contributes to a more productive and a more stable Canadian economy.
As we point out in our report, the bank has once again met its inflation-control target. Following four years of good inflation performance, Canada is, I believe, establishing a reputation as a low-inflation country. This reputation has been helpful as we have had to cope with fluctuations in international financial markets, concerns about the budgetary situation in Canada, and uncertainty which surrounded the Quebec referendum campaign.
[Translation]
In judging inflation performance, it is important to focus on the underlying trend rather than on the month-to-month fluctuations in the Consumer Price Index. We use the year-over-year change in the CPI, excluding the volatile food and energy components and indirect tax effects, as an indicator of the trend. This measure of inflation declined through the second half of 1995 and, at 1.6 per cent, is now in the lower half of our target range.
[English]
The inflation-control targets for monetary policy operate as a kind of built-in stabilizer for the economy. When the economy is expanding at an unsustainable pace which will lead to price pressures which are then likely to push inflation through the upper limit of our range, the bank will act to tighten monetary conditions in order to slow the pace of economic activity and ease price pressures. Similarly, a weak economy that implies a downward trend of inflation with a risk of going below the lower limit of our range will lead the bank to ease monetary conditions in order to stimulate economic activity.
In line with this approach, the bank has been acting since the autumn to lower short-term interest rates in Canada. Our most recent action took place last week when we lowered the bank rate and our operating band for the overnight rate <#00BC> of one percentage point. The bank rate is now 5 <#00BC> per cent, and the operating band for the overnight rate is now 4 <#00BE> per cent to 5 <#00BC> per cent.
The Canadian economy struggled through much of 1995 as the U.S. economy slowed, and Canadians had to cope with the sharp rise in interest rates early in the year following the Mexican currency crisis and market nervousness about the Canadian fiscal situation. Prospects for 1996, I believe, look more promising. The U.S. economy appears to us to be on a sustainable, low-inflation growth path, and easier monetary conditions in Canada are providing substantial support for economic activity here.
[Translation]
However, economic confidence among Canadian households remains weak. The recent rise in mortgage rates will not have helped. That rise reflected pressures on our bond yields coming from U.S. financial markets, following some strong economic data in that country. External shocks like that are bound to hit us from time to time. This time, however, the response in Canada was more muted then we have seen in the recent past - the Canadian dollar remained firm, differentials between longer-term U.S. and Canadian bond yields tended to narrow, and money market conditions stayed favourable for the move by the Bank of Canada to lower short-term rates.
[English]
I believe that the improvement in our fiscal situation over the last several years and our low inflation record are important factors contributing to this greater stability in financial markets, and I hope that we will see a further narrowing of the medium- and long-term interest rate differentials between Canada and the United States through the year.
The Canadian export sector has performed well, and I believe it should continue to do so. This is reflected in the encouraging recent increases in employment. Better employment prospects and more stable financial markets should, together, be helpful for household confidence and for a recovery in the housing market and consumer spending during the coming year.
[Translation]
I should also draw your attention to the information in the annual report on the bank's other activities. Like many other public sector institutions, the bank has undertaken a major reassessment of its operations and is implementing initiatives aimed at improving the effectiveness of its operations and lowering costs.
[English]
Mr. Chairman, that ends my statement. My colleague and I would be happy to answer your questions.
Senator Angus: I would like to welcome you, governor, and your deputy governor to our committee. It is always an important day for us when you come to our committee to share your outlook on the economy.
I wish to start with some basic forecasting questions. You mentioned that you would continue to lower short-term rates. The overnight rate is pretty low now. Could you forecast for the next 12-month period specific rates for the short, medium and long term?
Mr. Thiessen: That is always difficult for me to do, as you well understand. Forecasts that come from the central bank on interest rates have a tendency to affect the market rather more profoundly than one would like.
I cannot give you forecasts, but, as I said, there are positive fundamentals which will be helpful in the year ahead. One important factor is that our inflation rate is low. It is now running at something like 1.6 per cent. The American inflation rate is running at something like 2.7 per cent. Inflation in Canada is a full percentage point lower than in the United States. That situation should affect our financial markets increasingly in the period ahead.
One of our problems over the past period is that there has been uncertainty about the fiscal situation. Among many investors, there was a fear that governments could inflate their way out of a debt problem. With the improvement in the fiscal situation among all governments in Canada, I feel some of that concern is already diminishing and will diminish further. Both of those factors suggest interest rates which could be lower and certainly differentials which could be lower in the period ahead.
Senator Angus: I appreciate your reluctance, if not inability, to be specific, but you have to give me an "E" for effort on that question, governor.
I should like to persist a little in terms of the GDP. Are you able to be more specific in that field with respect to rates of growth in 1996-97?
Mr. Thiessen: Let me preface my comments, as all economic forecasters should, by saying that there is always a wide margin of error in any prediction about economic activity. Economic activity is subject to many factors and influences from abroad and elsewhere.
We are seeing growth rates of 2 per cent to 2.5 per cent in the first half of the year, and these rates will pick up in the second half of the year to perhaps 3 per cent or more. Much will depend on the issue of confidence and whether it manages to turn around during the course of the year. That is notoriously difficult to predict. However, if there is an improvement in household confidence in Canada, then the second half of the year will be at the upper side of our range rather than the lower side.
Senator Angus: Thank you for that.
Mr. Paul Jenkins, Deputy Governor, Bank of Canada: Another factor behind that view is the international scene, which we view as being fairly supportive of the Canadian economy. The U.S. economy is on a sustained, low-inflation growth track. Recent numbers out of Japan look very positive. As well, we believe that the European situation is beginning to stabilize. The international environment within which we are operating and into which Canadian producers are selling is also a positive backdrop for us looking ahead.
Senator Angus: I have been reading your recent annual report. In addition, governor, I noted several of your recent speeches, including one to the Fraser Institute in February and another one in January. You emphasized what appears to be positive action by both the federal and the provincial governments in wrestling with this fiscal problem and the debt situation. Implicit in your remarks is that you detect there is still much to be done.
In your opinion, what needs to be done, particularly by the federal government, to reduce medium- and long-term interest rates and, more particularly, the spread between Canadian and American rates?
Mr. Thiessen: Senator, I do not like to give specific advice to any government.
Senator Angus: This government is looking for advice, governor. They have asked for it.
Mr. Thiessen: The point I have been making is that we must get the public debt to gross domestic product ratio - the size of the public debt relative to the size of the economy - on a downward track. We know that the current ratio, which is roughly 100 per cent, depending on how you measure it, is a source of nervousness and instability in financial markets. The fact that our differential still remains wide says that there is ongoing nervousness and concern.
In order to narrow those interest rate differentials, I believe that the federal and provincial governments must combine to move their deficits down so that the debt-to-GDP ratio is on a downward track. As well, there must be no recurrence of severe political uncertainty in this country.
Senator Angus: I am glad you mentioned that. All of us here are anxious to know your views as to what could be done to instill or re-instill confidence in the households of this country and in our markets.
In your opening comment, you mentioned the October 30 events in Quebec. Would you elaborate on this issue of political uncertainty and how it affects us in Canada? Are you referring to the Quebec situation specifically?
Mr. Thiessen: I am, but any sort of severe political uncertainty is a cause of problem for investors. It is interesting to see how, for example, the Italians, who have a notoriously uncertain and unstable political system, suffer from high-risk premiums in their medium- and long-term interest rates as well.
When investors hold large amounts of government debt of a certain country, they want some reassurance that that debt will be serviced and that the value of their investment will not be undermined by inflation or some kind of massive depreciation of the currency. In political uncertainty of any kind, they worry about the willingness of governments to make the hard decisions needed for that.
Senator Angus: You referred us to the annual report of the Bank of Canada. I was particularly interested in the section at pages 12 and 13 dealing with the board of directors. This committee has been preoccupied lately with corporate governance, which is very much the flavour of the month in corporate Canada. You reiterated in your report that the role of the board at the Bank of Canada, as per statute and as per mandate elucidated many years ago now, is not to set policy so much as to ensure good, sound management in the bank.
Mr. Thiessen: That is exactly right.
Senator Angus: At the board level, are you comfortable that its mandate and its role today are suitable for the conditions that prevail, or is it perhaps time for a revision in that regard?
Mr. Thiessen: Senator, that is a very good question. Like everyone else, we have been spending time on governance issues. I believe that the statutory arrangements are still quite appropriate. However, like every other board of directors, it is important that our board look carefully to ensure that they understand what their mandate is, what kinds of terms of reference they operate under, and for what they must feel responsible. That also requires trying to set some line with respect to the kind of decisions you expect management and the board to take and what kind of oversight arrangements the board has in place with respect to the decisions taken by management.
Those are matters on which we are working. Many of them focus on our medium-term strategic plan which the board must approve.
I must tell you, Mr. Chairman, some of the arrangements are still in the process of changing because directors are still trying to become perfectly comfortable with regard to what they should feel responsible for and what constitutes carrying out their fiduciary responsibility.
Senator Angus: In analyzing the report, I have been trying to draw an analogy with the private sector corporate world. For example, I notice that you do not have a corporate governance committee, although I read into your last answer that you may soon have one. Is that correct?
Mr. Thiessen: That is correct.
Senator Angus: You are the governor, and you have your deputies. In my mind, at least, you act as the chairman of the board and the chief executive officer.
Mr. Thiessen: That is right.
Senator Angus: Can you comment on the issue of separating the functions of chairman, or governor, and CEO? As you know, it is not only something which is dealt with in the Dey report and some of the corporate governance literature, it is being looked at by the big banks. There is a different outlook in terms of the banks as compared with other corporate public companies.
Mr. Thiessen: I can certainly see the argument which says it is useful to separate the role of chairman of the board from that of chief executive officer. However, I must say that I do not think it is the most crucial matter. Much depends on the board and its independence and willingness to take initiatives. If you have a very large board, one which, perhaps, is not all that cohesive, then you may well need an outside chairman. Where there is a relatively small board, I am less convinced of that.
What you absolutely need to have is a group of outside directors who are able to meet independently of the management and who feel no hesitation and no inhibition about taking initiatives if they think things are going wrong. That is important.
Senator Angus: I notice you have a board with 12 directors, as well as a statutory position for the Deputy Minister of Finance and so forth. However, I did not see any reference to a "lead" director. Have you adopted such a concept?
Mr. Thiessen: We have not as yet. One of the things that we are working on is whether our executive committee and the outside members of our executive committee, of which there are four, would not somehow as a group take the role of lead directors. I admit to you, senator, that we are in the midst of a discussion on this very matter in the board of the bank.
The reason that it has not gone further is that we are in the process of changing board members. We have just had five new appointees. We have been slowing things down a little bit until our new members get on side.
Senator Angus: You are leading into the last point on governance which I want to cover. I notice that as of December 31, 1995, there were two vacancies on the board. Are all the vacancies now filled?
Mr. Thiessen: There is still one left.
Senator Angus: Do you have any say in the appointment of directors?
Mr. Thiessen: Not directly, senator. Certainly the board would have no compunction about giving their advice to the minister.
Senator Angus: Do you mean the board or you?
Mr. Thiessen: Both. Typically, these are decisions which are made by the minister with Governor in Council approval.
Senator Angus: I have seen it written, as I am sure you have, governor, that it would be desirable that some magic number would have special expertise in monetary policy on your board. Do you agree with that proposition?
Mr. Thiessen: It is certainly useful to have some people who feel more at home in monetary policy. The board's role is not to make monetary policy. It is to ensure, like a corporate board, that the management of the bank are professional, competent and take good decisions, not only in terms of monetary policy but in all the areas of responsibility of the bank.
Just as you do not expect corporate board members in the private sector to be experts in the field in which the company is operating, I do not think you need it in the case of the bank. It certainly does not hurt to have some members on the board who feel quite comfortable with the issues and therefore are a source of advice to other board members.
Senator Angus: I gather from what you have said and from what I know that under the present system, which is under review, board members are Order in Council appointments made in consultation with the Minister of Finance.
Mr. Thiessen: That is right.
Senator Angus: Therefore, there would not be a nominating committee of the board at the present time, or, as you have said, a corporate governance committee which would include that function. Is that right?
Mr. Thiessen: That is right.
Senator Angus: Mr. Chairman, I have many other questions for the governor, but I think I have overstayed my welcome.
Senator Meighen: On the issue of governance, I notice on page 13 of the report it is indicated that directors come from every province and provide an important link between the bank and their respective regions. I take the point that they reside in various parts of the country. In your view, is the presence of that one person on the board sufficient to put your finger on the pulse of the various regions? I realize it is difficult to divide monetary policy into 10 provincial monetary policies. Have you ever given any consideration to a provincial or regional advisory council chaired, perhaps, by a member of the board who comes from that part of the country?
Mr. Thiessen: That issue was discussed some years ago when the governance of the Bank of Canada got drawn into some of the constitutional proposals that were being put forward at that time. Most people found it difficult to see exactly how successful that would be on an ongoing basis.
It is far more important, quite frankly, senator, that the people from the Bank of Canada, the management people who are engaged in carrying out monetary policy on a day-to-day basis, get out on a regular basis and see, meet and talk with the people in the various regions. We have been doing that. We have a program whereby, in conjunction with our directors in each of the provinces, my senior colleagues and I go out on a regular basis to meet and talk about local regional issues. We keep a close track on the data.
However, that is not enough. You must talk to people who are working in that region to get a real feel for the psychology and the sense of confidence in the economy in the region. Currently, the best way of doing that is for us to get out there as often as we can.
Senator Meighen: I take your point, sir. However, is it not a fact that, no matter what you learn, it is impossible to divide yourself into any number of regional monetary policies?
You will remember that years ago there was complaint about tight money in the maritimes, where it was not required, according to the evidence. It was required in the Toronto region, for example. There is not much you can do to meet that situation and satisfy both views, is there?
Mr. Thiessen: Absolutely not. Monetary policy must always be national. Financial markets are national and international. Monetary policy must be a national policy. However, it must take account of what is occurring on in all the regions to put together this national picture. I believe that you cannot do that simply sitting in Ottawa, that you have to get out there on an ongoing basis and talk to people so that when you are putting together the national picture you get your finger on the pulse of what is going on in all the regions.
Senator Kolber: Welcome, Governor and Deputy. Thank you for appearing before us.
I should like to come at the question of the national debt, raised by Senator Angus, from a slightly different perspective. The Canadian federal debt, if I have it correctly, is approximately $580 billion, and the Canadian provincial debt is approximately $250 billion, which together equals 105 or 106 per cent of GDP.
Are there limits to the amount of debt a country can have? If so, are we near those limits?
Mr. Thiessen: Senator, that is a very difficult question to answer because there are countries that have higher debt-to-GDP ratios than that, and they still function. You can argue that they do not function very well, and you can argue that they pay dearly for that situation, but they still function.
There are not many cases in industrial countries where suddenly they can no longer fund that debt or they can no longer roll it over. Financial markets tend not to work that way. As debt levels get high relative to the size of an economy, they tend to demand larger and larger risk premiums in the interest rates, so the cost of carrying that debt becomes more and more expensive.
Senator Kolber: You are differentiating between bankruptcy and some sort of sustainable life.
Mr. Thiessen: It is very difficult to think of bankruptcy in the case of a country.
Senator Kolber: It has happened, though.
Mr. Thiessen: Yes, although not typically with an industrial country.
Senator Kolber: Who guarantees the debt? It is nothing to do with the Bank of Canada. The government of Canada guarantees it, does it not?
Mr. Thiessen: That is right.
Senator Kolber: Once that guarantee is given, is there any way they can get out of it? I assume not.
Mr. Thiessen: No.
Senator Kolber: In my opinion, the number one problem in our country is national unity. I am not sure that we have prepared the Canadian public for the potential consequences. Does the Bank of Canada believe that it has a duty to at least lay out the scenarios?
Mr. Thiessen: Senator, there is no question that, within government, the Bank of Canada is an advisor to the Minister of Finance on financial matters. Were there issues of that sort being discussed, we would participate.
I do not think that it is the role of the central bank to lay out public scenarios about what is in essence a political issue, not a narrow economic issue.
Senator Kolber: I do not think it is such a narrow economic issue. Bear with me for a minute. Assuming that there were separation, as horrible as that may be. After separation, if Quebec assumed roughly 22 per cent of the federal debt, Quebec's total debt would go up to about $202 billion.
Would bond holders not have the right to come to the Government of Canada and say, "Well, it is nice they have assumed it, but you are on the hook for it"? We would have lost 25 per cent of our tax base, and Quebec's total debt would be a horrendous amount compared to their GDP. Their deficit, for example, if my figures are right, would go up to approximately $15 billion, which is 9 per cent of their GDP and almost twice what Canada's would be.
Despite the fact that many Canadians say, "Let Quebec go," separating would be shooting ourselves in the foot. Are you willing to agree that a separation would badly affect all Canadians when it comes to the amount of money they would have to pay for debt?
Mr. Thiessen: I am sorry, senator. I hate to avoid answering questions, but I regard that as an extremely sensitive, political matter. I do not think unelected officials of the independent central bank consider that to be their role. I really do not. I do not wish to comment on those issues.
Senator Kolber: I am quite disappointed. It seems to me that, as the watchdog of our monetary policies, you should at least prepare Canadians for potential eventualities.
Mr. Thiessen: There are others who can do the preparation. The central bank must remain almost relentlessly apolitical. No matter how you cut it, getting involved in that debate undermines the apolitical position of the central bank.
Senator Kolber: It is not really a debate; it is just to say what happens in the event of something else happening.
The Chairman: Senator, the witness has said that he does not wish to deal with the question in the way you would like him to deal with it.
Senator St. Germain: Thank you for appearing here, Governor. My question deals with what Senator Kolber has brought forward. You have indicated that the bank has a role in stimulating consumer confidence. In light of that role, and in light of the fact that the possible separation of the country is undermining that confidence, do you not think that you have a responsibility, as the head banker of this country, to take a position on the very questions which Senator Kolber put to you, sir?
Mr. Thiessen: I believe, senator, that the responsibility of the central bank is to ensure that monetary policy and its operations in financial markets contribute to the confidence of Canadians. That is the role of the central bank; that is the responsibility we carry; that is why we have a separate and independent operation within government. I think the other questions are too broad, and, no, I do not believe so.
Senator Meighen: Governor, you move in circles where these questions are debated. Senator Kolber asked a pretty specific question about the impact on bond rates and financial obligations if a certain circumstance occurred. As you do not want to make any comment on them, who would you suggest we ask about that?
Mr. Thiessen: There are all kinds of people who operate in financial markets who can give you estimates. There is no one who can say what the precise implications on financial markets will be if a given hypothetical event occurs. You cannot do that.
Senator Meighen: You can give us a trend, surely, Governor.
Mr. Thiessen: Other people who operate in financial markets can certainly give you their views. I do not think that is our role.
Senator Meighen: We will leave that for someone else for another time. I cannot believe that, while it may not be your public role, you are not considering matters such as that in your deliberations within the bank.
Statements were made in a press release from the bank relative to clearing and settlements arrangements. As you are aware, there has been speculation that there may be some changes proposed with respect to the opening up of a payment system and allowing non-bank financial institutions such as insurance companies and brokerage houses and the like to become a part of it. Since we will not see you for some time, perhaps for a year, unless you have enjoyed this morning so much that you will ask to come back, in which case you would be welcome, of course, what would be the attitude of the bank on a strictly technical basis to the proposition of opening up the payments association to other players? What impact might it have if it were done?
Mr. Thiessen: This is a important question, Mr. Chairman, and it is one which needs to be considered. I know that the issue of how to look at it and how to examine it will be raised in the white paper. We have participated in that white paper. Therefore, I need to be rather cautious because it is not my role to tell you in advance what will be in the white paper.
Let me say, however, senator, that the payment system is a crucial part of the operation of an economy and, certainly, of its financial sector. You must get it right. You must ensure that there is competition so that the prices are as low as they can be. You also need to ensure that it is as free from what we call systemic risk as you can possibly make it. By systemic risk, I mean the possibility that the potential failure or problems in one institution do not spread to other institutions in a way that puts their survival in jeopardy. That is crucial.
For that reason, there has been a bill before the house, and it will be coming back again, which gives the Bank of Canada some oversight role with respect to those clearing and settlement arrangements that affect the payment system. In this way, we can keep a close watch on those systemic risk issues.
Senator Meighen: I appreciate that you do not like hypothetical questions. Either the payment system will be opened up or it will not be opened up. I do not know the answer to that question. You may or may not know it.
Let us suppose that it were opened up. Would you then wish for the Bank of Canada to have a greater supervisory role or the same role?
Mr. Thiessen: The supervisory role that has been envisaged in that bill seems to me to be the correct one. It gives us the kind of powers that we need to ensure that the arrangements for settling financial transactions of various kinds are done in a way that contain risk and, in the event some nasty thing happens, that it will limit the spill-over effects. Yes, I am content with those arrangements.
Senator Meighen: Do you mean regardless of the number and identity of the players?
Mr. Thiessen: I think so.
Senator Meighen: I should like to turn now to the question of intervention. In your report, you indicate the number of interventions the bank has made to keep the overnight interest rate from going above or below a limit. The bank, of course, has been active in foreign exchange markets to moderate movements in the value of the dollar. Do you keep a score card of your own with respect to how it turns out? Do you monitor the results of your interventions? If so, do you learn from that, or is it just a question of doing your best to take the right step at the right time? Have you ever had to take another step in order to rectify a wrong step?
Mr. Thiessen: With respect to our interventions in the overnight rate, that is a very technical business. We have an upper and lower band. We act to keep the overnight rate in that band. If it is pushing the top, then we go in to add reserves. If it is at the bottom, then we go in to subtract reserves. It is very technical. After the fact, you look at whether you were successful.
In that overnight market, typically, we are always successful in keeping the overnight rate within that band. I do not think it is an issue where you say, "Is there something we could do that is dramatically different or better?"
The introduction of the overnight range and the operating band in itself was an improvement. That came about as a result of looking back at what we were doing and saying, "Could we not do this better?" That was particularly true in 1994 when, if you recall, American interest rates and international interest rates went up rather dramatically. That hit Canada with quite a lot of force.
At that time, we were trying to try to calm and stabilize markets. We found that participants in financial markets were not always as sure as we thought they ought to be about what we were doing. We therefore found that we needed to indicate more clearly where we were aiming to keep that overnight rate because they were unsure about whether we were suddenly going to move it up or suddenly move it down. We introduced that range to provide greater certainty to financial institutions operating in that market.
More recently, we have undertaken to issue a press release every time we change that overnight range. Once again, it is to tell financial market participants why we are doing it so that they have a better idea of what we are about. Both those actions were as a result of looking back at our operations and saying, "Yes, we could do better".
When it comes to the exchange rate, we act as agents of the federal government. We have certain operating rules and principles under which we operate as their agent. We and the ministry of finance undertake every so often to do an examination of that. I believe the Auditor General sometimes looks at that as well.
Senator Meighen: No less an authority than The Toronto Star tells me that you are pursuing an effort to forge "an independent monetary policy". I do not always believe everything I read in The Toronto Star; however, is that a fair characterization of what you are endeavouring to do by reducing short-term interest rates?
Mr. Thiessen: I would not like to characterize it that way, senator. We are trying to pursue a monetary policy which is appropriate to what is going on in Canada but which also takes account of conditions in financial markets, both domestically and internationally. That is what monetary policy must always do. It must always look at domestic economic fundamentals and domestic and international market conditions.
We are seeing some rather favourable economic and financial fundamentals starting to take hold in Canada. Our ability to act recently simply reflects the fact that we have a low inflation rate. We have had a low inflation rate for four years. That inflation rate is lower than that of our largest trading partner.
It also reflects the fact that many concerns with respect to the build-up of foreign debt in Canada have been alleviated recently because our current account deficit has narrowed very substantially. The fact that Canada has been such a successful exporter over the course of the last few years has narrowed that deficit. This means that the build-up in foreign debt has really slowed down rather dramatically.
You can finally add to that an improvement to the fiscal situation in Canada.
All those factors mean that the underlying economic fundamentals make it easier for the Bank of Canada to take some of the moves that it has taken recently.
The Chairman: You lowered the rate last week, something about which there has been a reasonable amount of news coverage. As Senator Meighen pointed out, there was an article in The Toronto Star which accused you of having gambled. Yet this morning's news on the CBC quoted people as saying that what you did last week was very positive.
How do lay people like ourselves deal with such a conflict of adulation on the one hand and criticism on the other hand? How do you explain such a radically different reaction among watchers of markets?
Mr. Thiessen: It really is the fact that Canada went through a period when the underlying fundamentals were not very good and where what you saw more often in financial markets were negative reactions and concerns as opposed to the sense that, perhaps, economic policy and the economy generally is going well in Canada. It takes time for people to feel comfortable with the fact that things have improved. I would not like to argue that somehow everything is now wonderful and going smoothly, because there are still uncertainties out there. However, I do believe that the situation is better fundamentally, and it is taking some people a little while to realize that.
The Chairman: Does that mean that you expect more positive comments than negative comments? No matter what you did a few years ago, 60 percent to 70 per cent of the comments were critical. Favourable comments now are moving to 50-50 or better. As people gain confidence, is it your sense that there will be more positive reaction from commentators? Commentators not only influence people in the political arena, but I assume that they also have a significant influence on investors.
Mr. Thiessen: I think that is right. We have been trying to become more forthright and transparent - if I can use that overworked word - in what we are doing. For example, we are attempting to be clearer in setting the operating band for the overnight rate.
Not long after my last appearance here, we issued our semi-annual monetary policy report where we tried to be more forthcoming on how we see the economic situation, the trend of inflation, and monetary policy operating. We are trying to achieve a situation where people in the markets and people operating in the economy generally are not surprised by what we do. We want them to say, "Yes, that seems sensible." It is not a question of saying you are doing a great job or a bad job. It is a question of saying, "Yes, that seems reasonable." There is less surprise. Markets accept what you do. I think the issues of transparency and information are very important.
Senator Meighen: Just to finish off on the question of what you did last week in lowering short-term interest rates, presumably the success of that will be dependent to some significant extent upon what the Federal Reserve does in the United States today.
To what degree do our partners in the G-7 know about moves such as this in advance of reading it in the newspaper? Is there an advisory procedure that goes on prior to any steps being taken?
Mr. Thiessen: There is no specific process whereby central banks phone around to one another and tell them in advance. There is no real need for that. The regular monthly meetings of central bankers in Switzerland are far more important. They offer an opportunity to talk with all our counterparts about how they see the situation in their countries, what types of operating techniques they are using, what concerns they have, and what measures they think are going well. That gives all of us, I think, a fuller understanding of what is happening and a better expectation of what will happen.
In terms of advance information, no, none of us do that. It is not necessary.
Senator St. Germain: My greatest concern relates to consumer confidence, which seems to have eroded and seems to be the main factor in holding back our economy and job creation. You point out the factors of public debt, or the fiscal management of the country, and the GDP. What can the Bank of Canada actually do? It does not really control those two factors. What would you like to be doing that you are not doing to instill confidence in consumers across the country?
Mr. Thiessen: I firmly believe the most important thing we can do is persevere with our low inflation policy. In the end, that will yield the lowest interest rates that we can possibly attain. They have not been as low as many of us would have liked because of fiscal problems, but they are a lot lower than they would have been had the bank not been successfully pursuing this low inflation policy. The first thing we can do is give a sense of stability to the country.
A low inflation policy also allows us to avoid the booms and busts we had at the beginning of the 1980s and at the end of the 1980s and beginning of the 1990s. Nothing undermines consumers more than to see prices skyrocket and, the next moment, to see them fall. That is an important backdrop to helping consumer confidence.
The other issue is that all debtors are aided if we persuade people that inflation will remain low because we end up with lower interest rates. That helps governments get their fiscal situations into better order. It also helps consumers carry and service high debt levels. That is very important. Those things matter.
Senator St. Germain: Yet we had a blip in interest rates not long ago. I do not come from a banking background. I was previously in the housing industry, and it was impacted by that blip. Could you explain to the people watching these proceedings, especially those in the housing industry, what percentage of the debt is held by foreigners? How does the nervousness in that community affect our lending rates?
Mr. Thiessen: I will check with my colleague to ensure that I get the number right, but the number I carry around in my head with respect to the foreign holding of public debt is about 40 per cent.
However, I do not know that foreigners react much differently than Canadian investors. A large number of Canadian investors also have a choice between investing in Canada and investing elsewhere. You have a large range of people who are always at the margin. They are saying, "Do I invest in Canada, or do I invest elsewhere?" They can be Canadians, and they can be foreigners. They are looking for some comfort. If they are to be in Canada and stay in Canada, they want to know that the outlook is one where they will not suffer a loss - that is, that they will not find their investments eroded by inflation or by some dramatic depreciation of the currency. Those things matter.
Having said that, we will be affected. Just the other week, there was the news of a sudden, large increase in employment in the U.S. In one month, 700,000 jobs were created. The market reacted in a panic to that news. It said, "My goodness, does that mean the U.S. economy is suddenly growing so fast that there will be inflation pressures, and, therefore, we investors need to worry about our investments being eroded by inflation?" Interest rates and the bond market went up. That spilled over to Canada and virtually all other countries. It affected our mortgage rates, one year through to five years. It is interesting, though, that sober second thought has resulted in a gradual reversal of those increases. They have not been reversed completely, but when I looked at the markets this morning, at least half of that bump in bond yields had been reversed in the U.S. and Canada.
We will not avoid those. As I said in my opening statements, those shocks will occur from time to time. They cannot be avoided. However, the better the underlying fiscal, inflation, and productivity situation, the more moderate those shocks will be.
The Chairman: In response to Senator St. Germain, you said foreign debt was roughly 40 per cent of total public debt. Can you give us some sense of whether that percentage is increasing or decreasing, or is it stable?
Mr. Jenkins: If you measure Canada's net foreign liability position relative to GDP, it is currently around 45 per cent. That has increased over the last several years because of the increase in the current account deficit that we had seen over that period.
Through 1995, and particularly in the last quarter of 1995 with that current account deficit having been virtually eliminated, that ratio of some 45 per cent to GDP should stabilize. In fact, it should begin to narrow in, back to levels which would be closer to 35 to 40 per cent over the next several years.
The Chairman: Do you have some sense of what I would call a target number, however unofficial, which you would regard as appropriate or desirable? Is there some sense of when it is too big and some sense of when it is acceptable?
Mr. Jenkins: The fundamental issue is that, at a minimum, you stabilize that debt-to-GDP ratio.
The Chairman: Do you mean foreign-debt-to-GDP ratio?
Mr. Jenkins: I mean any debt-to-GDP ratio. You can apply that same concept to the public sector, to the foreign level of indebtedness. Regarding our public-debt-to-GDP ratios, as our level of national indebtedness begins to decline, you will see that improvement also showing up in a reduction in our net foreign liability position.
There is no such thing as a target per se, but certainly the situation at the moment would be working to improve both our foreign situation as well as the public level of indebtedness.
The Chairman: Do I infer from that that you would prefer the foreign number to be smaller rather than larger? In theory, you could be lowering the total percentage to GDP and still be increasing the percentage that was foreign-owned.
Mr. Jenkins: Yes, definitely.
The Chairman: You would prefer a lower number?
Mr. Jenkins: Yes.
The Chairman: Senator St. Germain raised the issue of the large U.S. employment numbers which were out a few weeks ago. You said, Governor, that there was a blip and that the blip is slowly easing its way out of the system.
Do some consequences of that blip remain? Does much of it wash out but leave some residual factor in the system? If that is the case, then presumably the cumulative effect of a number of blips can be fairly significant over a period of time.
Mr. Thiessen: In the end, if it reverses completely, it will disappear. Nonetheless, there are some people who are faced with a decision at that point and they are undoubtedly affected by it. The effects do not disappear. Anyone who had to make a decision at that moment has been influenced by it.
Senator St. Germain: Governor, on page 35 of your annual report are the details of operating costs for running the Bank of Canada. How many people are in the bank? You point to a reduction of 500 staff positions. I did not think there were 500 people working in the Bank of Canada. There must be considerably more than that.
I note you have a task force adjustment termination of $33 million; yet if you add up salaries and other staff expenses for 1995, you are at about $98 million as opposed to $99.4 million. This is a very a high-profile institution within the country. Downsizing has been a predominant factor in the private sector, with massive reductions and improved efficiencies in the operations of business as a whole. I believe the bank is basically a business, the same as any other financial institution or industry in Canada.
Can you comment on staffing levels? Will there be significant improvements in that particular area in 1996?
Mr. Thiessen: We have been running recently at just over 2000 people at the bank. That is down from a peak of about 2500 in 1990. There has been a gradual decline in the number of people who work at the bank.
However, we have done, as we say in our annual report, a major reassessment of many of our core operations. Like so many others, we asked ourselves three questions: Is this a business that we need to be in? If we need to be in it, do we need to be in at this level of activity or this level of service? Finally, if we were to look at the way we ran that operation and examined re-engineering it completely, could we reduce our costs?
Out of that activity review, we will lower our staff by the year 1999 to a level of about 1500 people. There will be a decline of about 500 people. We expect, by that time, that our annual operating costs will be about 20 per cent lower per year.
Senator St. Germain: My last question goes to one of the most destabilizing factors in this country - the state of this nation on unity.
I am not trying to put you on the spot, sir, but you have such a lead role in the country. Did you have in place a monetary strategy in the event of a "yes" vote in the October referendum? Are there strategies in place for the future?
Mr. Thiessen: Senator, that area is always difficult for me to address. I would say to you that the Bank of Canada, because of its role in financial markets and its role as the central bank, is constantly concerned about contingencies and about ensuring that we would be in a position to carry out our role of making the financial markets and payment systems work should Canada be hit by one kind of shock or another. I leave it at that, sir.
Senator Ghitter: Mr. Governor, I am a non-member of this committee. I always look forward to your appearance here. I find it most interesting, and I thank the committee for continuing this tradition.
I noted in your introductory comments your reference to job prospects. I suspect that you see the country somewhat differently than I do. Let me give you my view so that you can help me from the viewpoint of consumer confidence.
I see a situation in our country where downsizing has become a household word. Many Canadians are being laid off in not only the private sector but also in the public sector.
I also see Canadians' savings at a 23-year low. That tells me that Canadians are dipping into their resources because their incomes are dropping. I see Canadians taking moneys out of their RRSPs, as I understand it, in unprecedented numbers.
I see tremendous pressures upon Canadians in these areas. The element of confidence and the hope for job prospects are not what you imply in your introductory comments today.
I see studies coming out of the United States just very recently which intimate that, although there is an element of job creation there, the jobs are being filled at much lesser incomes. In other words, people who are facing the experience of downsizing are forced to accept jobs in order to maintain employment at about half the income which they were receiving previously.
Even though there may be the 700,000 jobs to which you referred in the United States, they are not the same kind of jobs. They are jobs of a lesser challenge, paying substantially less to those who used to receive higher incomes.
From the point of view of jobs and a feeling of confidence, that does not lead me to conclude that all is well in Canada. If that is true, does that not really undermine the optimism of your introductory comments and put a cloud over the Canadian economy from the point of view of the very important element of consumer confidence?
Mr. Thiessen: It is certainly true that confidence is a problem. I did not wish to downplay that in my opening statement, because it is a problem.
I was trying to emphasize that there have been some huge changes happening in Canada. I believe that those changes are for the good. They will improve fundamentally the ability of this economy to work effectively.
We have been seeing a huge restructuring of Canadian business and, more recently, a restructuring of our public sector. Those are two major changes in this economy. By and large, they have been occurring over the last five years or so. They are not unique to Canada, and they are going on elsewhere. Needless to say, it is creating a huge amount of uncertainty and nervousness about the future.
If one did not see that process somehow leading to a good end result, then I think one would have cause to be fearful about it. While the uncertainty, the change, and the downsizing which is part of that restructuring is enormously painful and difficult for the people involved, I believe that out of it we are getting a more productive, efficient, competitive, and modern private business sector in Canada. I really do believe that is for the good.
I also believe that the changes that are occurring in the public sector to get our deficits under control, to get our debt-to-GDP ratio down, and, indeed, to make the public sector more efficient will also yield benefits to Canadians. It will mean that they will get better government for less money. It will also improve productivity.
Both of those things say to me that there is a future that will imply both rising employment and a rising standard of living.
Senator Ghitter: Could it also mean that many Canadians will not participate in the benefits you are describing and that many Canadians who are not within certain financial structures will be abandoned and forgotten within this new culture, this new economy that is being created? Clearly there are many Canadians, not just in the workforce in lower paying jobs but professionals, who are involved in this restructuring in our economy and who are finding it difficult to survive. There are many young graduate lawyers waiting on tables in restaurants and performing jobs of that nature. That is very much part of what is happening in Canada today.
Is this change bypassing many Canadians? If so, is there something the government can do about it? If there is, do you advise the government in any way as to better ways to enhance job creation, retraining programs and the like that may be of assistance?
Mr. Thiessen: I admit freely to you that I am not an expert in issues of training and improving the labour market. There is no doubt that change has taken place and that change needs to take place. The kind of training that people need to function well in this new economy is undoubtedly different from what it was before. For many Canadians, that means acquiring new skills. There are certainly some people who find that process very difficult if not impossible. They are the ones who, undoubtedly, will be affected rather negatively by all this. Obviously governments need to worry about how to help and protect people of that sort.
If we do not go through this restructuring, we will be worse off. I do not think we have much choice. We have to get on with it and try to ensure that people get the training and support they need to cope with it. It is a very important thing for us to get through.
Quite frankly, senator, while I know there are many worried and nervous people out there, so far we have been doing a pretty good job, given the change that needed to take place.
Senator Ghitter: Can you comment on consumer confidence? It is a very important element in your equation. I do not regard it as being very high right now. I may be wrong.
Mr. Thiessen: I agree absolutely, senator, that that is a fundamental issue. It is one of the reasons you found me wanting to put some wide margins of confidence on any forecasts that I gave. It is so unpredictable. There is no doubt that the fluctuations in interest rates, the referendum campaign, and the problems that have occurred on the fiscal side have left a feeling of uncertainty and nervousness among Canadians.
I believe that the improved fiscal situation which I think will lead us to lower interest rates, particularly in the medium and long term, will help. This means that the costs of servicing some of the debts that people hold will go down.
The private sector is now getting on with the business of expanding. We are now at the stage where there will be more job creation coming out of the private sector. We have already seen some improvements in the last few months, but three months do not a spring make. If that kind of thing continues, then both of those will gradually improve the attitudes of Canadians.
During 1994 when the U.S. economy and our exports started to expand very rapidly, the increase in employment was pretty dramatic. It was close to 4 per cent. There was an improvement in confidence to be found during that period. It still had a way to go, but you did see it improving. I am hoping that we will see that same thing as this year goes by, senator.
Senator Angus: On the question of confidence, to what extent is the strength of our dollar a key element? You will recall that several months ago, when the dollar seemed to be strengthening, you tightened up the money a little bit. There was some criticism that the economy may not have been strong enough to sustain a tightening at that time. Indeed, some say that there was a deterioration of confidence. It must be, and I know it is, a very fine line. Can you comment on that?
It seems that a stronger dollar would enhance confidence. In fact, it would be one of the elements that Senator Ghitter was seeking. However, the reverse seemed to be your policy.
Mr. Thiessen: You are absolutely right, senator. When interest rates were going up, particularly after the Mexican currency crisis in January, there was a great deal of concern about the Canadian fiscal situation both federally and provincially. At that time, the Canadian dollar started to weaken. Indeed, not only did it start to weaken, we found that interest rates right along the yield curve were starting to rise. You could see and feel an erosion of confidence in financial markets. People who had invested their money in financial markets were getting very nervous indeed. We felt that there was a need to come in to provide some support and comfort to them.
Needless to say, on the other side of the coin, this came as a shock to the people who were already indebted, the people who were contemplating borrowing.
However, if we had not tried to calm the situation and provide confidence in the Canadian dollar, those interest rates would have gone a lot further and the effect on the debtors and the prospective borrowers would have been fundamentally worse. We had to fix the first situation before we could undo the other one, and subsequently, of course, interest rates came down.
Senator Angus: The last two years you have been here, you emphasized quite strongly that the fundamentals are good, and you are doing the same in your third visit. We in the committee have tried to ask you to put on your forecasting hat again and tell us the right level of the Canadian dollar vis-a-vis the U.S. dollar. It has stayed pretty much in a fairly tight range for the last two years. In terms of providing confidence to the people, are you able to say roughly what you think is a sound range and a good reflective value for the dollar?
Mr. Thiessen: There is no level at which the Canadian dollar is somehow right. We do operate in a floating exchange rate regime. The Canadian dollar will move up and down depending on what is going on in our economy.
I believe that the underlying situation with respect to the Canadian dollar is indeed a positive one. I mentioned some of those things earlier: The fact that our inflation rate is low, and lower than our major trading partner; the fact that the business sector has been investing in ways to improve their productivity; the fact that the fiscal situation is improving.
As those risk premiums that I was talking about in our medium- and long-term interest rates go up, they tend to weaken the dollar. As they narrow in, because people think the fiscal situation is better, that provides some kind of underlying support for the Canadian dollar.
Finally, we have the point that my colleague Paul Jenkins made earlier. The improvement in our current account situation means that our foreign debt relative to the size of our economy looks like it will start going down, and that ratio is going down.
All of those things provide support for the dollar in the period ahead. Since we do not have a target for the Canadian dollar, because monetary policy is oriented to price stability, I do not wish to give you a forecast. However, there are some underlying things which provide good support for our dollar.
Senator Angus: Notwithstanding your detractors, or the detractors of your policy of Canada being a low inflation country, as you say it has become, and that keeping the dollar down as opposed to the supply-side type rhetoric, do you feel that this in itself will eventually enhance the strength of the dollar?
Mr. Thiessen: There is no question that a well-performing economy where productivity is rising and inflation is low will tend to cause a dollar to rise over time. If you want an example, witness Japan over much of the period of the 1970s and 1980s.
The Chairman: Governor, you have repeatedly this morning talked about consumer confidence. Perhaps this is just my market research or mathematical background, but how do you measure consumer confidence? Do you have a scientific kind of approach to keeping track of consumer confidence, or do you do what those of us on the committee do, which is read newspapers and talk to people? I understand with investor confidence you can read financial pages, but how do you know where the consumer is?
Mr. Thiessen: We use the Conference Board consumer confidence measure, but we supplement it by talking to as many people as we possibly can. It is once again that point that I made earlier about the need to get out and talk to people from one end of the country to another, not just business people but other individuals, householders as well, to get a sense of whether that confidence measure that the Conference Board gets from its survey has an up-side bias or down-side bias.
The Chairman: You are attempting to take survey data collected in this case by the Conference Board, but also to do your own interpretation of it on the basis of your own contacts and conversations with a network across the country. Thank you.
[Traduction]
Senator Simard: Mr. Chairman, I have two questions for the Governor of the Bank of Canada. They pertain to the management and powers of this institution. I refer you to page 22 of your 1995 annual report where you state the following, and I quote:
It intervened 65 times to keep the rate from going above the upper limit of the band; 22 times to prevent it from falling below the lower limit; and 14 times to signal changes in the band.
The bank also intervened on exchange markets to moderate rapid fluctuations in the dollar. Do you follow up on your interventions? What lessons have you drawn from this exercise? Were the results what you expected? Has the bank had to intervene further to counter unforeseen effects of previous interventions?
M. Thiessen: As far as our operating band for the overnight rate is concerned, it is really a technical operation. It is only when the overnight rate nears the upper limit of our operating band that we add reserves. When the overnight rate is close to the lower limit, we tighten up things a little. However, it is really a technical operation. It is not something where we can ask ourselves if it is possible to do things more efficiently
We introduced this operating band to give financial markets a clearer picture and help them gain a better understanding of the situation. It is the most significant improvement that we have made. We weighed our performance and we decided that we could improve our monetary policy and our market operations.
As far as foreign exchange rates are concerned, we are an agent of the Department of Finance and we comply with operating principles and criteria. Each year, we get together with our Finance Department colleagues to review our performance and activities and to determine how well things are going.
Last year, we changed the way we intervened on exchange markets and, along with the Department of Finance, decided to expand the range within which the Canadian dollar would be permitted to fluctuate. We decided to allow for some fluctuation in the market and to refrain from intervening because it is not always necessary to do so. Quite often, when the exchange rate rises one day, it falls a little the next.
The Bank of Canada does not need to moderate fluctuations in the exchange market. This is unnecessary because of our stewardship and role as an agent of the Department of Finance. There is a kind of accountability process involved.
Senator Simard: You have stated at least two or three times that you are an agent of the Department of Finance. Is that correct?
Mr. Thiessen: Yes.
Senator Simard: I am sorry, but that was not the perception I had of the Bank of Canada and its governor. Perhaps you are an agent. Could you try once again to explain...
Mr. Thiessen: Yes, of course.
Senator Simard: ...and to convince me that you are an agent, albeit one free to act?
Mr. Thiessen: We act as agents only in a few areas. We are not agents in so far as monetary policy and bank notes are concerned. When we intervene on exchange markets, we are agents of the Minister of Finance because Canada's international reserves are held by the minister and his department, not by the Bank of Canada. We are also agents when it comes to debt management, in that it is the minister's debt, not that of the Bank of Canada.
Senator Simard: The brief discussion that we have been having for the past several minutes brings me to my second question.
In the final paragraph of your opening statement, you mentioned the bank's 1995 Annual Report and the fact that your institution had moved to reassess its operations with a view to taking an in-depth look at the way in which the bank carries out its responsibilities.
What did this comprehensive review reveal? What measures have you taken as a result of it?
Did this review provide you with an opportunity to reflect upon the bank's autonomy and freedom of action? Some Canadians indeed question whether the bank is completely autonomous and independent vis-à-vis the government. Were you able to determine during the course of this review if your institution has sufficient latitude to act?
You may be an agent of the Minister of Finance, but you are really an agent of the Parliament of Canada. Therefore, what did your review uncover? What measures have you taken? Does the legislation governing the operations of the Bank of Canada ensure that you enjoy the independence you require as a major central institution deserving of the respect of all international markets? I would be interested in hearing your views on this subject.
Mr. Thiessen: This review basically focused on the efficiency of the bank's operations, particularly as regards bank notes. Bank notes account for almost half of our expenses. We looked at how bank notes are distributed everywhere in Canada and we determined that it was possible to come up with a more effective distribution system. This is precisely the type of activity that we carry out as an agent of the government.
With respect to debt management, we conducted the same kind of review. The objective was not really to examine in-depth the responsibilities of the bank and the Bank of Canada Act. That is not the type of review we conducted. Our focus was really on efficiency issues.
[Translation]
Senator Simard: Would you and your institution consider undertaking this type of review and making recommendations to Parliament concerning the autonomy and powers of the bank?
I recall that when you first appeared before this committee two years ago shortly after your appointment, I raised a question, which reflected the concern felt by my fellow citizens from New Brunswick, about the profits and lending policies of the banks. You set me straight by stating that you had no authority or control over the banks. Would you like to have more control over certain institutions? Would you like to have more autonomy and more powers vis-à-vis the Government of Canada?
Mr. Thiessen: I believe the bank has enough powers to carry out its responsibilities. However, I have to say that it is always useful at some point to take a closer look at the Bank of Canada Act and to ponder whether the Bank's situation is ideal or not. Can we improve the Bank of Canada Act?
When the next review of financial sector legislation is undertaken, I believe we will look at the Bank of Canada's situation. Four or five years ago, the House of Commons Finance Committee examined the situation and the autonomy and powers of the Bank of Canada. The Manley Report was the culmination of this process. The consensus at the time was that the Bank of Canada Act was a good piece of legislation and that no major changes were warranted.
Senator Simard: I see.
Mr. Thiessen: However, in future, I believe we should take another look at the Bank of Canada Act.
Senator Simard: Thank you, Governor.
[English]
The Chairman: Governor, in winding up, I would deal with a series of somewhat disparate topics in light of the questions which have already been asked.
When you did your study to improve what you just called the efficiency of the bank as opposed to its mandate, you said in response to Senator St. Germane that another 500 jobs will be cut between now and 1999, which is roughly 25 per cent of your work force. The magnitude of that cut can only be achieved in one of two ways, or a combination of them. I can either be with productivity or the cessation of certain activities. My guess is that there is no 25 per cent productivity improvement by itself. I am left to conclude that are some things you will stop doing which you have historically been doing. Can you tell us what they are?
Mr. Thiessen: Yes, of course. The main area is in the distribution of bank notes. That was the main study we undertook. I was saying to Senator Simard that that accounts for about half our budget.
The Chairman: Does that mean that switching from a $2 bill to a $2 coin substantially improves the efficiency with which the bank operates?
Mr. Thiessen: It certainly lowers our costs, yes.
The Chairman: If you wanted to lower your costs, we could go to a $5 coin.
Mr. Thiessen: We could, but we do wish to make the monetary system and the currency system efficient. We want it to be efficient not just for the Bank of Canada but for all the users of the system. We want to look at not only efficiency but effectiveness as well.
The main thing that we have done is to look in depth at the bank note distribution system. We have found that the Bank of Canada was duplicating some of the things that private sector financial institutions do. In our discussions with those institutions, we found that we could do things much more cheaply by operating together to put in place a new, joint system of distributing bank notes. For many of the people in the Bank of Canada who are engaged in that business, their jobs will no longer be needed in the period ahead.
Senator St. Germain: Why would we spend millions of dollars to advise that there has been a change from a paper bill to a coin when people have no choice but to accept it anyway? Perhaps it is not your decision to spend that money, but it does not make sense when we have cutbacks in medical areas, welfare, and UI. Why would we go out and spend millions of dollars on advertising to advise people of something they have no choice but to accept?
Mr. Thiessen: That is an issue of the mint. I am not sure I want to comment on it. I think you have to provide people with some information so they know what is coming and why it is coming.
The Chairman: I can understand why you would duck that question.
Perhaps I could ask you a few questions about the interest rate spread. At the present moment, the short-term rate difference between Canada and the United States is at something like a 12- or 13-year low. The mid or the early 1980s was the last time short-term rates were lower in Canada than the United States. That clearly indicates that there is something unique and different about the current situation that has not existed for 10 to 15 years. Can you tell us what those factors are?
Mr. Thiessen: The most important factor has to be the outlook for inflation. If you have an outlook for inflation in Canada which is lower than the outlook for inflation in the U.S., it means that over time you think the Canadian dollar will rise relative to the U.S. dollar. That is what inflation differentials do for you, not at every moment in time, but over time. In those circumstances, you are willing to accept a lower short-term interest rate in Canada.
The Chairman: Presumably there is some limit to what the difference can be and how far below the U.S. rate we can go. Without asking you to make a comment or prediction about what the U.S. Federal Reserve open market committee is likely to do today, if in fact the U.S. raises its short-term rate, what are the consequences of that for the bank in policy terms and for the Canadian economy? In particular, does raising the U.S. short-term rate make it difficult for the Canadian economy to keep expanding the way it is?
Mr. Thiessen: It is always important to go back to why these things happen. If interest rates outside Canada are going up, we must ask ourselves why they are going up. If short-term interest rates are going up, it is because the economy is much stronger, expanding rapidly, and more likely to lead to inflation pressures. You end up with two effects. One is the interest rate effect, but the other effect is what is going on in that economy which will also affect Canada. In the circumstances that you were positing, it would probably mean a much stronger U.S. economy, which would spill over and mean a much stronger Canadian economy. We would have to make our judgments then. What would be the appropriate reaction of the Bank of Canada?
The Chairman: If U.S. short-term rates go up, you would watch the situation very closely for fear that it would generate pressures in Canada that you would want to prevent from building up a head of steam.
Mr. Thiessen: If the U.S. raises its rates, that probably says there is a head of steam in the U.S. economy. Think back to 1994. When the U.S. economy gets a head of steam, the outlet tends to be the Canadian economy. We are the closest supplier when pressures start to hit the U.S. economy.
The Chairman: That deals with my comment on short-term rates. Can I ask you a question on -
Mr. Thiessen: Perhaps I interrupt you to say that the U.S. Federal Reserve has decided not to change their rates.
The Chairman: In that case, my question is still useful, but theoretical nevertheless.
I have some questions about long-term rates. When you were with us a few years ago, you indicated that 100 basis points is what you would regard as a normal difference between Canada and the U.S. Currently we are running on longer-term rates at 130 to 150 basis points. In your opening statement, you said that you hoped to see a further narrowing. I noticed you increased your optimism during the course of this presentation. In responding to Senator Meighen, you said that you think there will be a further narrowing. I take "thinking" to be a somewhat more positive statement than "hoping".
What needs to be done from a policy standpoint to make that hope or thought a reality? Do you have some sense of how long it will take us to get back into what you called a normal range of roughly 100 basis points?
Mr. Thiessen: If we were to continue to have an inflation rate lower than the Americans, and if the outlook was that that was going to persist, then I would suggest that 100 basis points would no longer be the norm. It might be less than that.
Obviously the U.S. market is the biggest financial market in the world. It is hugely liquid. People pay a premium for that. They will always accept somewhat lower interest rates in the U.S. for that reason than they would elsewhere. However, in a situation such as, for example, Japan versus the U.S., where the inflation rate in Japan has been lower for a long time and will be lower in the future, you end up with interest rates which are much lower there than in the U.S. All of those things could play with us to a lesser extent, but certainly they could have an effect.
As we were saying earlier, the public-debt-to-GDP ratio must be on a declining trend. The foreign-debt-to-GDP ratio must be on a declining trend. Unfortunately, I cannot tell you at exactly what moment you reach a level where you say, "All is well."
You can look carefully at those differentials. If they are narrowing, then you know you are doing the right thing. At some point, when they get very narrow indeed, you are there. You have achieved a degree of confidence.
The Chairman: You observed that markets exhibit a degree of confidence in the extent to which governments will get what you call the debt-to-GDP ratio under control. We are not running around 100 basis points but up to 50 per cent higher than that. Is it a logical conclusion from your observation, therefore, that there continues to be out there in markets, particularly international markets, some scepticism about whether the public sector in Canada will stay the course?
Mr. Thiessen: I am afraid you are right, Mr. Chairman, that there is still some scepticism there. Remember, it is not a very long time since the situation turned around. We are basically talking two years in which governments in Canada have worked very hard to get their fiscal positions in order. That follows on quite a long period of time during which frequently the fiscal targets were not met by either provincial or federal governments.
It will take a little time before people are reassured.
Mr. Jenkins: As well, the credibility of monetary policy is an element. We had 20 years of inflation averaging 7.5 per cent in this country, and we are on a very good track now. However, it does take time to build that credibility. We are certainly committed to that low inflation environment.
The Chairman: Just so I am clear, you have repeatedly stressed combined federal and provincial public debt. Is it logical to conclude, therefore, that, for example, if any one of the three or four largest provinces did not get their deficit situation under control, that would have an impact not only in that province but on all of us by virtue of the fact that the cumulative public debt ratio would not go down at the rate or to the levels that markets would like to see it?
Mr. Thiessen: That is right.
The Chairman: So a single province has an impact way beyond its own provincial borders.
Mr. Thiessen: People do look at the overall situation. If any one government is large enough to affect the overall situation, it will have an influence, yes.
Senator St. Germain: In relation to the value of the dollar, we have gone, as you have pointed out, for 20 years with an average rate of inflation of 7.5 per cent, but our dollar has gone down dramatically in value as well.
Where does this fit into the picture, and where does it bottom out? This is an erosion factor, I believe, in our trade relations with the U.S. Softwood lumber from British Columbia is being attacked, and I think that stumpages is just an excuse. The truth of the matter is that the lower value of our dollar prices our lumber very attractively in the U.S., and that is one of the main factors in bringing these pressures.
How does this fit into your overall strategy? I am often asked that question because north-south trade is much more significant in British Columbia than it is in other parts of Canada.
Mr. Thiessen: The decline of the Canadian dollar over time from being roughly at parity with the U.S. to a low of 69 cents U.S. was largely a function of an ongoing inflation rate which was higher here than in the U.S. As I was saying earlier, with lower inflation you would expect the dollar to rise; with a higher inflation rate you would expect the dollar to decline. That is the largest part of it.
Over any short period, the dollar will go up and down depending upon how strong our economy is relative to the American and how strong primary commodity prices will be, because that is still important to us. The fact that the Canadian economy has been somewhat weaker than the U.S. economy over the last few years has been one of the factors that has caused the Canadian dollar to be on the low side, because that is a way of providing some kind of monetary support for the economy.
I talk to quite a few Americans. I have not heard those who look at these things rather carefully and are not trying to make a point complain that somehow we are engaging in unfair trade practices because of the current level of the dollar.
The Chairman: I noticed in your annual report that you made $1.8 billion for the federal government last year, which is an increase of some 17 or 18 per cent. If you were a subsidiary of a holding company, as head of the subsidiary you would be given a profit level or a target amount that you are expected to make, and that would be your plan for the year. Are you given such a target amount? Does the government expect you to contribute "X" to its coffers each year?
Mr. Thiessen: No. The profit that the Bank of Canada earns is not a kind of operating profit. We do not earn our revenues in the course of our operations; we earn them because we are the issuers of money. Money gets issued at zero interest rate, and we then invest the funds in Government of Canada bonds and bills. We make money on our balance sheet.
The final decision of the board of directors of the Bank of Canada is to try to spend an amount carrying out the responsibilities of the Bank of Canada which is not a dollar more than we need to carry out those responsibilities effectively. It is the board of the bank that makes that decision.
The Chairman: From a management standpoint, you focus on the expense side, not the revenue side?
Mr. Thiessen: Absolutely.
Senator Meighen: With regard to gold reserves, I think it is correct to say that we have been doing more selling than buying of late in this country. Asian countries generally hold about 5 per cent of their reserves in gold. What percentage do we have? Is there a level set by common agreement? What is the reaction of the gold-producing industry to actions in this area, either buying or selling?
Mr. Thiessen: You are not surprised to hear that gold producers would always prefer that official holders of gold not sell it. The Government of Canada, which holds the gold reserves, had a very large proportion of those reserves in the form of gold as opposed to the form of interest-earning currencies. The reason you hold exchange reserves is so that you can use them if you need to. Therefore, you want them in a form that is useable, or at least a large chunk of them.
We were in a situation where a large chunk of our reserves were in gold and therefore not usable, so the government has gradually brought that down. I forget precisely what it is now, but the crucial thing is what form your reserves should be in so that they are useful to you.
Senator Meighen: Could you elaborate on that?
Mr. Thiessen: That is basically so that you have currencies with which you can intervene in the markets in the event that your exchange rate is subject to some huge shock for some reason.
Mr. Jenkins: It terms of the numbers, as of the end of 1995, senator, the level of reserves held by the Government of Canada was just over $15 billion, and the amount held in gold was just under $200 million.
Senator Meighen: What percentage would be that?
Mr. Jenkins: It is negligible, less than 1 per cent or so.
Senator Meighen: That has come down from what?
Mr. Jenkins: That has come down from levels as high as, ten years ago, under $1 billion. It is a very small percentage.
Senator Meighen: Do I understand you correctly that the reason for the reduction in gold reserves is that there are other forms of reserves which can be better used? From a basket of various reserves, you can select the one best-suited to your needs.
Mr. Thiessen: We have a basket of reserves, the large bulk of which are in U.S. dollars. You need reserves which are useable but which will also earn a rate of return as they are held.
Senator Meighen: Why would you hold anything but a nominal amount of gold?
Mr. Thiessen: That is where we are, sir.
Senator Meighen: That is where you intend to stay, under present circumstances?
Mr. Thiessen: In the end, I have to use the same response which I gave again and again to Senator Simard. We do act as an agent here. The reserves and the gold are held by the Government of Canada in the name of the Minister of Finance. We are their agents. It is their policy which decides whether more or less gold is held. We are the ones who go out and sell it for them when they do decide to sell it.
Senator Meighen: You made some good sales at some high prices.
Mr. Thiessen: We did.
The Chairman: Governor, we thank you and the deputy governor for being with us this morning. We look forward to our annual session again next year, although given your comments on the payment system and the fact that the white paper will be before us soon, you may well hear from us before then.
To avoid the disorder of a scrum but to allow the press an opportunity to speak directly to the governor, we have arranged a room across the hall for a press conference.
For committee colleagues, we have an in camera meeting tonight at 5:30 in room 256-S of the Centre Block.
The committee adjourned.