THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
EVIDENCE
OTTAWA, Wednesday, November 1, 2017
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:15 p.m. to study the present state of the domestic and international financial system.
Senator Tkachuk: Good afternoon and welcome to the Standing Senate Committee on Banking, Trade and Commerce this afternoon. My name is David Tkachuk and I’m the chair of the committee, at your good graces.
I want to remind you of the expiration of the October 31 order, though we still fall under it. We do have difficulties in the sense that if there is disagreement or there is a motion, then we’ll have to disperse. Other than that, we’re all gentlemen and ladies, so we should be able to continue this meeting. I’ll be making decisions, as long as you know a challenge will be a problem. The decisions will be on the speaking order so let’s put it this way: They will have to be agreed upon.
With that, this is all inside baseball stuff, governor, and I’m sorry about that, but I think everybody wants to know. We’re going to meet again tomorrow on the same basis. We will not meet next week.
Senator Massicotte: You finally expired.
Senator Tkachuk: I haven’t expired. I fall under the old order. But I’ll tell you what, Senator Massicotte: You may have, so if I don’t recognize you, you’ll know why.
Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins will give testimony about the Bank of Canada’s Monetary Policy Report 2017, which was released last week. Thank you both for being here today to brief us, governor. The floor is yours and we look forward to questions after you finish your presentation.
Stephen S. Poloz, Governor, Bank of Canada: Thank you and good afternoon, Mr. Chairman and committee members. Senior Deputy Governor Wilkins and I are pleased to be back before you today to discuss the Bank of Canada’s Monetary Policy Report, which we published a week ago.
When we were here last April, we were celebrating the fact that we had upgraded our economic forecast following a long period of disappointment. I’m pleased to tell you that many of the positive trends that we saw and discussed then have continued. Sources of economic growth have broadened across sectors and across regions, and the process of adjustment to the oil price shock is essentially complete at a macro level.
[Translation]
The bank raised its policy interest rate twice since our last visit in July and September. We did this in the context of very strong economic growth over the first half of the year and solid progress in the labour market. Over the summer, we saw evidence of firming inflation and an economy that was rapidly closing its output gap. With these two rate increases, we have taken back the cuts we made in 2015, which were crucial in helping the economy adjust to the oil shock.
[English]
Growth in the first half of this year averaged just over 4 per cent at an annual rate. This reflected strong consumer spending backed by rising employment and income together with increased business investment and a jump in energy exports. We’re now starting to see signs of moderation in the second half, which we forecast in July. Growth in consumption and investment is expected to ease. Growth in housing is projected to slow further, in part because of the measures introduced by the Ontario government last April.
All told, we forecast the economy will expand by 3.1 per cent this year before slowing to 2.1 per cent in 2018. This 2.1 per cent is still faster than the growth rate of our potential. We estimate that the economy is now operating close to its capacity.
Inflation should reach our 2 per cent target in the second half of next year. That’s a little bit later than we projected earlier because of the temporary impact of the stronger Canadian dollar earlier this year.
We’re at a crucial spot in the economic cycle, and significant uncertainties are clouding the way forward. In our MPR we identified the four most important sources of uncertainty, and I’ll touch on these now.
The first source of uncertainty is inflation itself. There have been several conjectures about the apparent softness of inflation in Canada and in many other advanced economies. Some have argued that globalization is restraining inflation. This could be due to increased imports from lower-cost countries, for example, or it could be due to the effect of Canadian companies participating in global supply chains.
Others point to the impact of digitalization on the economy. They suggest that digital technologies could lower barriers to entering into some sectors and lead to more competition. The rise of e-commerce may be changing price-setting behaviour, and digital technologies could promote innovation and higher productivity, which could create disinflationary pressure.
The second source of uncertainty is the degree of excess capacity in the economy. We note several signs that point to slack remaining in the labour market. For example, the participation rate of young workers is still below trend, and average hours worked are less than we would expect. With the economy now operating close to capacity, we expect to see investment by companies, together with job creation by new and existing firms, and rising productivity. This should serve to raise the economy’s potential output, increasing the amount of non-inflationary growth that is possible. However, this process is highly uncertain and not at all mechanical, so we’ve built it into our projection in a conservative way.
[Translation]
The third issue is the continued softness in wage growth. While employment growth has been strong in Canada, wages have not kept pace. The slack in the labour market is certainly responsible, in part, for this effect, and there will be a lag between the time this slack is used up and when we see stronger wage growth. However, other factors, including globalization, may also be affecting wage dynamics.
[English]
Finally, the fourth issue is the elevated level of household debt and how that might affect the sensitivity of the economy to higher interest rates. Bank staff have recalibrated our main economic model used for projections to capture key information about housing and debt. This work tells us that the economy is likely to respond to higher interest rates more than it did the past. However, we’ll watch incoming economic data closely for evidence to support this idea. We’ll also look to see how the household sector is responding to the new rules about mortgage underwriting.
We also outlined several other risks in the MPR. Taken together, these risks give us a balanced outlook for inflation. We have not incorporated into our projection the risk of a significant shift toward more protectionist trade policies in the U.S. This is given the range of potential outcomes and the uncertainty about timing. However, we acknowledge that uncertainty about future U.S. trade policy is already having some impact on business confidence and investment spending, and this impact is reflected in our outlook.
In this context, governing council judged that the current stance of monetary policy is appropriate. We agreed that the economy is likely to require less monetary stimulus over time, but we’ll be cautious in making future adjustments to our policy rate. In particular, the bank will be guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity and the dynamics of both wage growth and inflation.
[Translation]
Since this is an important message, allow me to repeat it in French. In this context, Governing Council judged that the current stance of monetary policy is appropriate. We agreed that the economy is likely to require less monetary stimulus over time, but we will be cautious in making future adjustments to our policy rate. In particular, the bank will be guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.
[English]
With that, Senator Tkachuk, Senior Deputy Governor Wilkins and I will be happy to take your questions.
Senator Tkachuk: Governor, you say our economy is close to full capacity and has been running that way for the last year. You made a decision to maintain the interest rate level as it is. What indications would you be looking for to raise the interest rate?
Mr. Poloz: Well, these are the four issues that I’ve outlined. These are, in effect, issues that come between what we think is the natural sequence of events in an economy when it reaches full output or full capacity.
What we think is the output gap is approximately closed; that is, we’ve used up what we call the output gap. However, in most economic cycles, the output gap and the labour market gap are parallel concepts; they move very much together.
For a longer cycle, like the one we’ve been through, where we’ve had a long period of disappointing economic outcome, primarily at the global level but which affected Canada, what we get is secondary effects. Some economists call it scarring in the labour market: people become discouraged because they don’t get that first job, they drop out of the workforce, or they’re forced to work part-time instead of the full time they'd prefer to work, or they work not in their field but in some other field. We aren’t operating at our full human capacity, and yet the output gap can be closed sooner because what happens is some of those folks get left behind in that upturn.
So the rest of the story is where those two concepts catch up to each other, where, in fact, the extra growth in the economy, which appears to be more than the economy’s potential, creates the extra investment because labour is sitting right there ready for firms to pull them into an expanded organization. It’s that phase that would create more capacity than we build into our standard mechanical — not quite mechanical -- that’s too extreme of a word — but a more standard trend line for potential output.
Every economy does this at this stage. I call it the sweet spot. It usually does it in a small way because it’s been a small cycle, but in this case it’s been a long cycle.
For instance, the participation rate of youths aged 15 to 25 today is five percentage points below where it was before all this trouble started back in 2007. So in our MPR we point you to what we call our labour market indicator, which is different from the unemployment rate as normally expressed. The unemployment rate takes who’s looking for work divided by who’s actually working, but if people have dropped out of the workforce, they’re not captured anywhere in that. What we look for is participation in the labour force to pick back up again because discouraged folks become encouraged by rising demand, more job creation and higher wages.
The natural sequence goes from excess supply in the economy, which pushes down inflation, to closing that excess supply gap, and then companies are out expanding their business, picking up new workers from the excess supply in the labour market. Then, eventually, that becomes rising wages and then rising inflation. It’s that sequence that is a little bit disruptive or there’s a wedge in it, given the experience of the last five or six years.
We’re monitoring those issues really carefully and basically testing our understanding of the economy in real time, whereas a basic model would say, yes, the output gap is closed; therefore, it’s time to begin raising interest rates. The United States reached this stage almost two years ago and over the last two years has grown more than original models would have predicted, and it reemployed a lot of people who were knocked out of the workforce during the great recession. We find ourselves in a similar situation.
Senator Tkachuk: I always thought the Bank of Canada dealt with interest rates on the basis of inflation. The whole idea was to keep inflation under control.
Mr. Poloz: Exactly.
Senator Tkachuk: Now, you’re telling me that the Bank of Canada is looking at a 5 per cent unemployment rate for those under the age of 18 to 25. Isn’t that the job of policymakers of the Government of Canada? Aren’t they the ones who are supposed to worry about productivity and getting people into the labour force, not the job of the Bank of Canada?
Mr. Poloz: Yes, they are. What we operate on is our projection for inflation because it takes almost two years for any action that the Bank of Canada does to actually affect inflation. For us, the question is, what will inflation be 18 months to 2 years from now? If it’s at 2 per cent, then we’re in good shape.
What I’m saying to you, if we are right about these factors that I’m mentioning, is that over the next two years we will underperform that inflation target. That’s the risk. There’s a downside risk to inflation which comes from these sources. Taking full acknowledgment of that risk, the last thing we want, I think, is to entertain more downside risk on inflation given that we’ve been below target for quite some time.
Our forecast, based on our core model, says that we’ll be at about 2 per cent a year from now, which is fine. But I’m saying if these dynamics I’ve mentioned operate as they often have at this point in the cycle, we will be below that. If so, we need to allow those things to continue to unfold because there will be substantial benefits to society if we raise permanently the level of income for the economy as a whole by being patient on this front.
I’ll just point to the United States as an example. Over the last 18 months or so, they have done exactly that. A number of people who thought they may never be reemployed in the workforce have reentered in that phase of the business cycle while the fed has been extremely patient in adjusting its interest rate path.
Senator Tannas: Governor, we’re a regional place where we’re meant to think about regions. As you consider interest rates, I’m from a region that shudders with that idea, and I don’t know if you’d agree, but is probably not in a position to absorb much more in terms of interest rates or additional expense blows. We’ve got families that are still severely dislocated from the energy shock and, frankly, from other policies that have been developed by others.
As you examine that, how much consideration is given to a specific region or regions that are lagging behind?
Mr. Poloz: We give considerable consideration to regions. In fact, we have people on the ground in all the regions of Canada talking to companies on a daily basis so that we have full insight into what is going on. That helps us tell our story in a dynamic way.
For instance, as the collapse in oil prices back in 2014, early 2015, unfolded, it was those resources on the ground that were able to tell us not just what the models would say that there’s going to be less investment in the energy sector. They could tell us company by company, without naming names, but it adds up to a cut of this much. We had very good intelligence on that, and that enabled us to assess that we needed to cut interest rates immediately, and we did so twice when we had an update to that analysis.
That was, of course, a shock that had primarily regional impacts but would add up to a significant macro effect. Once the macro economy gets closer to normal, we’re more or less forced to think about it in a macro sense. When I say that the adjustments to the oil price shock are mostly behind us — or, indeed, in a macro sense, they are behind us — I don’t mean that all those effects are gone in every region. What we mean is that the economy has adjusted in such a way that there’s more offsetting strength than in other parts of the country or sectors, that when things add up, they add up to where we belong.
We’ll always have those regional or sectoral differences. The Bank of Canada really doesn’t have the ability to do anything about those. However, they are important to us in terms of understanding how the dynamics are unfolding and, therefore, absolutely crucial that we be on the ground to hear all about them. Only one tool we have, though, and only one goal, and that’s aggregate inflation; so that’s absolutely right.
Senator Tannas: Thank you, sir.
Senator Wetston: I’ve been asked to ask questions from Senator Moncion. How would you like me to handle that?
Senator Tkachuk: Ask them yourself, and you don’t have to give her credit.
Senator Wetston: I don’t wish to have my questions diminished in the face of her questions.
Senator Tkachuk: That isn’t going to work that well. Ask your two questions; and if there’s a second round, you can become Senator Moncion.
Senator Wetston: You indicated you would conduct a fair committee meeting.
Senator Tkachuk: I’m trying my best. I really am.
Senator Wetston: Do I get two and she gets one?
Senator Tkachuk: You get two; she gets none. But on the second round, you will have another two, and you can ask that question.
Senator Wetston: Governor, I will talk about a meeting which I think the senior deputy held in September on monetary policy framework issues and the 2021 inflation target renewal, which I found very interesting.
You did identify a number of areas that you felt were important for further study. The choice of the monetary policy framework, how monetary policy should dovetail with other policies, notably macro-prudential and fiscal, and the appropriate form and degree of transparency and communication for central banks. Would it be possible for you to elaborate on any of these to give us greater insight into the meeting that you had and the further work that you’re doing in this important area?
Carolyn A. Wilkins, Senior Deputy Governor, Bank of Canada: Thank you. What we intended to do with the workshop was to kick start what is a long and very intense research program to look at the inflation target agreement that we have with the government and the aspects around it that support the framework that we have in place. We wanted to do that in a very transparent way so we webcast the event. We also invited a wide range of people from labour, academia and from across the world to tell us what they thought we should be studying and what the real issues were. That’s where that list came from.
When it came to the framework itself, people were confident in the one we have for inflation targeting. At the same time, they thought it would be worth doing some fundamental research in other areas, like dual mandates or nominal income targeting instead of price level targeting. That was one bucket we talked about.
Another one that’s interesting and pertinent today is that we talked about the fact we have one tool, yet, at the same time, we see there might be some financial imbalances building up — household debt, as an example — that require other tools, like macro-prudentials: new housing rules and tighter mortgage underwriting processes. We call them macro-prudential tools. The area there is to think about how monetary policy and macro-prudential tools work together. It’s a complex thing that requires complex modelling, but it’s an important question. That was the other one.
Fiscal policy you can wind into that as well, so that will likely be part of our research agenda.
The third area is transparency. We’re dependent on our policies being credible. We’re accountable. There are techniques out there for communicating with the public and stakeholders. We’ve received a number of useful suggestions in that area we will consider that relate to the types of information disclosed, the frequency of press conferences, the level of language we use and the ease with which people can understand what we’re talking about.
It was a great day. It’s not the end of the conversation; it’s the start of the conversation. We’re looking forward to reactions to the kinds of things we’ll put out on the website and to future events we’ll have.
Senator Wetston: I will now ask my second question, which I think I indicated before. It may not be attributed to me.
In your report, October 17, OSFI published its review of Guideline B-20, Residential Mortgage Underwriting Practices and Procedures, which comes into effect January 1, 2018. The bank’s estimate of the effects of these guidelines incorporate model simulations and historic experience following changes in housing regulation. With the impacts of the changes to the housing sector, regulation is what is being noted. There is considerable uncertainty around the overall impact of these measures on the economy because it’s difficult to forecast the change in behaviour of borrowers and lenders.
Considering the change, you also indicate in the report that these guidelines are expected to cut 0.2 per cent GDP by the end of 2019, and the economic impact is important.
OSFI Guideline B-20 does not imply government commitments and doesn’t impact CMHC. We’re therefore curious that OSFI’s powers are broadened to the point where their decisions can affect Canada’s economic growth significantly and the role of the Bank of Canada, specific to growth, maintenance and slowdown of the Canadian economy.
Considering this, could you tell us about the relationship between the Bank of Canada and OSFI, especially where the economic growth of countries are affected so dramatically? Also, what are the means of intervention you have to prevent such situations?
Ms. Wilkins: Our relationship with OSFI is very open. We spend time together through various committees — as you know, this committee and the senior advisory committee — and we discuss these kinds of policy measures.
One needs to keep fully in mind the underlying purpose of the guidelines in B-20, whether they apply to mortgages that are insured or the recent ones that are uninsured, as in this case. The purpose is to support the quality of borrowing that’s out there.It’s important to the fabric and foundation of the macro economy, because if underwriting practices go awry and people get ahead of their skis in terms of what they can manage over time in terms of debt, including mortgage debt, that ends up having macro consequences. So this .2 or .3 on growth needs to be taken in the context of what it means for steering credit growth in a way that underpins financial stability and sustained macroeconomic growth. That’s my general answer.
In terms of the actual specific estimate, clearly there’s a bit of uncertainty around that, because you really don’t know how households are going to react. They could decide to wait a little longer to qualify before they buy the same kind of house, or they could decide that instead of the house that costs this much, they will buy one that’s less expensive or find other means of financing, such as talking to their moms and dads.
There are other doors they can go through, and it’s seeing over time how that plays out for us to know what the effect is, at least in terms of quality of borrowing.
Last year with the changes on B-20, the quality of borrowing on the insurance space has improved a lot. It used to be — to use a metric we like to use — a share of households that had loan ratios of over 450 per cent went from 18 per cent to less than half of that. These are the kinds of things we will be able to monitor, and we feel that over time, the improvement in the quality of debt will stand us in good stead from a macro point of view.
Senator Enverga: You mentioned four issues you’re looking into, and two are about labour. You mentioned there are several signs that point to slack remaining in the labour market, participation of young workers is still below trend and average work hours are less than what we would expect.
At the same time, on your third issue, you mentioned wages have not kept pace with the subsequent wage growth. I’m from Ontario, and they were talking about a $15 minimum wage. Do you think it would help, or would immigration help the costs? Is that a good thing to do at this point?
Mr. Poloz: I’m not sure which question you would like me to address. Let me try to address them in a row.
Senator Enverga: The $15.
Mr. Poloz: First of all, we’ve said clearly we think there’s excess capacity in the labour market. The laws of supply and demand still operate well. If there’s excess labour, wages don’t go up rapidly. If you can find someone, it’s not like you can’t find anyone, so you don’t post a higher wage to attract someone, so wages stay moderate. Contributing to that has been the migration of workers from the oil patch into other sectors of the economy — jobs that were well-paying to ones that are probably less well-paying. In terms of numbers, you get that suppression of the average wage being paid because of that transition in the economy.
We also believe labour markets are fundamentally global. When your company is contributing parts of a product to a supply chain, you’re competing not just with a firm across the street but firms anywhere in the world that could take over that piece of the supply chain. Therefore the bargaining power for workers may be suppressed in an increasingly globalized labour market.
For all these reasons, it’s difficult to know exactly how much excess supply there is.
That’s the starting point. Now we say, “What happens if we add into the mix a minimum wage increase?” I’m sure this is going to disappoint you, but economists can’t really agree on all the effects this is going to have. It’s a complex analysis, because we have people earning below the minimum wage today who will get a higher minimum wage. People just above the minimum wage may get an increase in their wages as well. However, firms may find other ways to control their costs, and therefore wages elsewhere may not go up as much.
There are so many different channels through which this can affect things.
Our view is that we’re inflation targeters. We’ll watch it unfold, and if it has an extra impact on inflation, we’ll see it when we see it and understand it when it happens. However it turns out, I think it will be a modest impact.
Senator Enverga: Will immigration help?
Mr. Poloz: Immigration is important in many respects. You’ve heard us talk about potential output. That potential output is a trend line, which we think is growing at about 1.5 per cent per year. About half of that growth comes from workers; have I gotten that right? Or is it more like 1 per cent from the workers and half a point from productivity or vice versa?
Ms. Wilkins: If you want to see how much productivity, immigration is about 0.5 of the 1.5.
Mr. Poloz: Immigration is about 0.5 of the 1.5. That is the number I need. So about one third of the growth we’re predicting — the trend line for Canada — is coming from immigrants participating in the workforce. If they weren’t coming, your potential growth rate would be that much lower. That’s a really important ingredient and it’s a share that will continue to rise through time as the natural domestic workforce is slowing because we’re getting a bit older. The baby boom is over and we’re all moving into the retirement phase.
That slowdown in the economy is being offset by growth coming from immigration, which is a positive thing. It’s an essential building block to economic growth. Does that affect wage rates? On the margin, it may, because if we didn’t have immigration, we would perhaps have shortages of labour in certain areas. But we would also have less economic growth, so we would have less demand as well as less supply. Again, it's a complicated analysis; there’s no easy answer to that. Starting from first principles, immigration is a really important layer to our economic growth track. Without it, it would be much less.
Senator Wallin: I have two questions, and I will put them out and let you answer. President Trump said today that he has contacted Jerome Powell and tomorrow he will appoint him the next Fed chair. This is a gentleman that has served on the board for a long time. What are your thoughts about him in that role and what it means for us?
Second is the question of NAFTA. You said in your remarks today that you have not incorporated into your projection the risk of significant shift toward more protectionism in the U.S. But you also said that you acknowledge the uncertainty about future U.S. trade policy and this impact is reflected in the outlook. I don’t know if you can quantify how much of it you’re taking into account. I think in other venues, you’ve called this a source of angst. So please give us some sense of that.
Mr. Poloz: I’ll answer the easy question and then turn the NAFTA one over to Ms. Wilkins.
I simply won’t comment on who Mr. Trump may appoint as head of the Fed. Certainly, central banks don’t comment on each other’s policies. But I would say there’s probably far too much focus on individuals in this analysis. Just as we have a team that makes these decisions, they have a team, and there are a great deal of checks and balances in that system. It’s the economics that speak most loudly in any of that analysis, and should. I look forward to hearing concretely of the actual decision because that’s obviously someone we spend a lot of time with.
As for NAFTA, which is a much harder question, I’ll turn it over to you.
Ms. Wilkins: Clearly there’s a lot of uncertainty about trade policies in general and NAFTA in particular, and it’s something we’re watching very closely. When it comes to monetary policy, you need to choose what part of that uncertainty you take on board and factor into your policy decision which part you’re going to set aside until you have more information.
What we felt confident enough to take on board was the effect that uncertainty, in and of itself, was having on the behaviour of businesses. They’re thinking about taking their investment decisions. From our Business Outlook Survey, they’re quite positive in planning on investing, but we think they’re planning on investing a little bit less than they would have otherwise without this uncertainty.
If you’re a firm with the opportunity to invest in the U.S. or somewhere else instead of Canada, you might take that opportunity to hedge your risks.
Quantitatively, we subtracted about 0.7 off of the investment profile. The investment profile is rising, but less than it would have otherwise. And through some other channels, that also takes off about 0.2 from exports. Of course, when and if we get more information about what types of things might happen and the probabilities in the timing, we may be in a better position to think about what it would mean for monetary policy.
[Translation]
Senator Carignan: In an article in this morning’s Bloomberg News, one of you predecessors, Mr. Dodge, said that your approach to interest rates was misguided. In his opinion, the indebtedness of households and businesses has reached an almost excessive, if not dangerous, level, and a gradual increase in the rate would remedy this situation. Could you comment Mr. Dodge’s statement?
Mr. Poloz: At the Bank of Canada, the risks related to household debt are constantly discussed. That statement is repeated everywhere in our Financial System Review and our Monetary Policy Report, published last week. We take these risks into account in our decisions. As I mentioned in my introduction, these are the four key questions for the months to come. One of the most important issues is the sensitivity of the economy to higher interest rates. We raised the interest rate on two occasions over the past 14 weeks. The council decided that this period would allow us to gauge the response of households and the rest of the economy to this change in the interest rate. We will carefully consider the data over the coming months. We consider this risk very important, and it is taken into account in our discussions. It is not a risk we set aside, as this article says.
[English]
Senator Black: Governor and deputy governor, thank you for being here. I want to broaden and follow up on my colleague Senator Wallin’s question in respect of NAFTA.
In particular, as a senator from Alberta, the underlying concept to my question is that Alberta, on a per capita basis, perhaps on the largest basis in Canada, has the most exposure to the U.S. market. What advice can you give to government and to business in light of the following worries: One is that NAFTA is going to collapse in the immediate future; and two, that the U.S. is going to reduce the personal and business tax rates prior to Christmas. For the purpose of this question, let’s assume both those facts are going to happen.
This is on people’s minds. What advice would you give to people in terms of what preparations and plans they should be making prudently.
Mr. Poloz: There’s a very basic reason why we have not analyzed this question in any detail, on NAFTA in particular.
Let me start with taxes. A year ago, during the run-up to the U.S. election and in the first few weeks after it, there was a pretty strong sense that there would be a significant change to the tax system in the United States. Markets embraced it and reacted to it before any of it even came close to happening, and we acknowledged that in our forecast in January simply because the market had acknowledged it. So as you can imagine, if your forecast was as before but interest rates had risen for no reason that was contained in your forecast, it would distort your forecast. So we put some assumptions about the tax changes into the forecast so that we had a coherence with market outcomes.
As months went by, the probability of that particular tax package happening went down, markets gradually extracted themselves from that judgment and we, too, took that assumption out of our forecast.
Now I think it’s prudent for us to wait and see what actually happens. There will be some lag between when it is finally announced and when it actually hits the numbers.
In analyzing that, it would be very hypothetical today, but I think what you need to consider is whether that would cause the U.S. economy to pick up speed and if it did how much of it would spill over to Canada. We did some shocks like this back in January and again in the April review, and the spillovers into Canada proved to be quite small. I acknowledge there’s a fundamental issue here that may be around the competitiveness of our companies, but I’m setting that aside for the moment.
In terms of a macro shock, when you combine that with more posturing around Buy American and so on, there are various leakages that suggest it wouldn’t be a very large thing for us to deal with in terms of the economy.
On the competitiveness front, that’s another matter and, of course, that has nothing to do with monetary policy, but one of the things you have to bear in mind is there are a lot of things that can move. One of the things that can move when such an announcement takes places is the exchange rate, which has a direct impact on the competitive issue for companies. Since that can move by itself, it’s something we can only take into account when it occurs. It’s not like we can pretend to understand with any accuracy how much it might move. Fundamentally, the reaction to such a change will depend from company to company, so it’s very hard to model as an aggregate thing.
NAFTA is a similar thing where its importance varies a lot from company to company. We have not analyzed it for one important reason, and that is we simply don’t want to be making statements about the consequences or so on when we’re in the midst of some important and sensitive negotiations between governments. It’s really not our place, but there are some facts that are worth bearing in mind.
Of course, the issue is that if you were to aggregate NAFTA, what happens next? Some economists have done some analyses like this and they would say the first thing that would happen is perhaps that those tariffs would go from zero to what is held under WTO law. Well, the average tariff under that regime is something like 4 per cent. So if you’re a company that has a zero tariff in your space and it becomes a 4 per cent tariff, that’s an important consideration. However, it’s smaller than the fluctuation in the Canadian dollar that you faced over the last six months.
It’s important to keep it in perspective. Firms adjust to shocks of that magnitude all the time, so we shouldn’t get carried away with this sort of analysis. We try to be reasonable about it. As to determining at what pace it might happen, it could be a very gradual thing. Not knowing the answers to any of these questions, we’ve chosen not to incorporate them.
But I do think the most important channel is that uncertainty channel we mentioned before. We know that, on average, Canadian companies are operating at capacity. In the manufacturing sector, something like 75 per cent of the sub-sectors are operating above capacity. This plus our surveys tell us very strongly that people out there are ready to invest and expand their businesses. They are, but not en masse, and we expect that to continue to gather momentum.
Imagine if you’re ready and you’re sure what you want to do but then you’re not sure what NAFTA will look like. That has to slow people down. We think even though people say they’re planning to invest, we know they’re planning to invest less than they would if they were certain. Companies actively mention options such as expanding their operations in the United States as a hedge against that uncertainty.
That’s another reason why when I say we’re watching this capacity question, there are lots of things in there which could make it true or less true and NAFTA just happens to be one of them. The biggest benefit to NAFTA when it was signed was on this channel: You could invest in the United States or in Mexico just as freely as you could invest here and optimize your operation across the whole area. It was much less about the tariffs than it was about that. So that’s the channel that I think would be most influenced if NAFTA were actually in danger.
Senator Black: And what advice would you give to business?
Mr. Poloz: I don’t usually give advice, senator, but what companies are saying to me makes me think they’re thinking it through and are basically telling me that they need to keep their options open and be realistic. We don’t have free trade per se. We’ve got a trade agreement, so it’s all about what would replace it. If there are things happening on one side of the border, what else happens on this side of the border? Nothing stands still. What would the Canadian dollar do in such a scenario? No one is able to predict these things.
With that, I’m impressed with how companies are saying, “I need to get on with business and I need to make these investments anyway.” That says to me that if there is a change, they’ll make those adjustments down the road, but not today.
Senator Black: Thank you.
[Translation]
Senator Massicotte: Thank you, Governor and Ms. Wilkins. I would like to follow up on Senator Black’s question, because I have the same concern. I am very surprised to hear you say that the bank did not do an impact study on the absence of a North American agreement. It’s a very important factor. I can understand that you might not want to share the conclusions of such a study, but if I understand correctly, there has been no simulation, no report, and no analysis on your part to measure the gravity of the consequences. Did I understand correctly that no such study was done?
Mr. Poloz: That’s right. There is no such study for the reason I mentioned. The list of possibilities is so long that it is impossible to analyze anything specific. We could analyze a lot of possibilities, but this would not yield any information.
Senator Massicotte: The consequences are potentially serious.
Mr. Poloz: In our macroeconomic models, the trade sector is very simple. We don’t go into each sector, subsector, et cetera. That type of general equilibrium model is important. This is the model that microeconomists use in their analyses. You have to have a marriage between micro-models and macro-models.
It’s an ambitious analysis. It can’t be random. You have to wait for the details, if there is a shock to be analyzed.
We also consider this to be a general macroeconomic shock. It is not just a matter of monetary policy. We will need to take into account the reaction of other Canadian policies. It is not the list of possibilities….
Senator Massicotte: You have a lot of knowledge, and you are a highly regarded economist. And so I would like to have your opinion on what would ensue should NATO come to an end, should the free trade agreement no longer apply, and if the World Trade Organization came to the fore.
Some newspaper articles claim that there would certainly be a recession, whereas others say there would not; the difference may only be 1.7 per cent. You say 4 per cent, some people say 7 per cent, and others say 1.7 per cent. Still others say that it would be equal to the variation in our currency over one or two months. Is it important? Is it serious? Should we delay our purchases and consume less? Should businesses wait?
Can you give us some idea of the importance of the situation?
Mr. Poloz: As you know, I think that the exchange rate is very important for the Canadian economy. What is unknown is the adjustment process. If there were such a shock, businesses may all react differently. The macro factor is very difficult to predict, and I’m not going to do a hypothetical analysis. That is not possible, and I would only add to the rumors in the market. I don’t think it would be useful to do that.
[English]
Senator Unger: Thank you, witnesses, for your presentation. Speaking of shocks, Mr. Poloz, you were quoted in a Canadian Press article when being asked about cyber-threats and cybersecurity. You said: “Every event you hear of sounds different, or happens in a different way. . . .There’s all these things you and you think, ‘My God, how do I get my arms around that whole risk and what are the consequences?’” I wonder if you would comment about that.
Mr. Poloz: Certainly. That’s one of my favourite subjects, so I’m happy to have that question.
Senator Unger: Mine too.
Mr. Poloz: I think of this in the same way that I think about other public goods, such as lighthouses or military. Often, we rely on guidelines to help companies or financial institutions to meet standards for being resilient to cyberattacks. We do the same thing ourselves. We invest a lot of money nowadays to ensure that we’re resilient to cyberattacks, so that’s what I would call prevention. Then, of course, we also have to invest in responses or post-crisis adjustment if an attack does occur.
In many countries, including our own, we have a lot of emphasis on requirements. You need to meet this standard or that standard. I suggest that this may not prove to be enough for us to actually prevent a major attack. Much like having your own private bodyguard or police force for a company would not protect society from a major military attack. We need to think of those things in similar ways. That suggests an important role for the public sector. I won’t comment on things that are moving around in Ottawa, but there are some significant initiatives underway in Ottawa. It’s better to ask others about those things. Just to say that the Bank is seated at the table, so we’re engaged in those conversations and those initiatives.
For us, the most important component of the system here is the payment system. The payment system, of course, is made up primarily of our banks. Of course, there are lots of institutions, but, at the heart, some 90 per cent are the major banks and Payments Canada, which runs the systems that connect them all together. That network, including ourselves, is of crucial importance to the health of the Canadian economy. So our main preoccupation beyond our own cyber posture is our posture around that system. There’s a lot of collaboration underway among those institutions to work on that and to continually upgrade that posture so that we’re keeping pace.
In the article, I was basically saying that, when you wake up in the morning and learn of yet another cyberattack, it never sounds the same as the one you heard about last month. It sounds completely different, and you wonder, “How do my systems people keep up with all those things?” We’ll say, “Well, are we okay with that?” They’ll say, “Yes, that was because of a patch that we put in two or three months ago or something like this.” It becomes so obvious that you need to be right on top. If you’re late with your patches, you’re vulnerable. Almost like, if you don’t get inoculated, you’re vulnerable against things.
Anyway, would you like to add anything?
Ms. Wilkins: No, I think that was a perfect answer.
Mr. Poloz: Okay. Well, there you go.
Ms. Wilkins: It keeps us both up at night.
Senator Tkachuk: Do you have a follow-up question, Senator Unger?
Senator Unger: A comment. So you start off by giving this a lighthouse analogy.
Mr. Poloz: Yes.
Senator Unger: If there were a cyberattack on an electrical grid, would you still use that reference?
Mr. Poloz: Yes. So one of the dimensions of this issue is what we call critical third-party suppliers. When I talk about the payment system and the banks and Payments Canada and ourselves, that’s an important network, but we all rely on power or the Internet or the Cloud in order to run those businesses.
These supply relationships create other vulnerabilities in that system, so that envelope has to be extended out into those channels as well. That’s exactly how we think of it, and it’s exactly how the government is thinking it through in terms of — I mentioned the lighthouse — building a better lighthouse. It’s exactly that, to protect us from high-tech, as opposed to low-tech, threats.
[Translation]
Senator Maltais: Good afternoon, Governor and Ms. Wilkins. It’s always interesting to welcome the Governor of the Bank of Canada to our committee. My question is for Ms. Wilkins.
When I arrived, you were answering a question put by Senator Wetston concerning mortgage rates, in the context of the guideline issued by the Office of the Superintendent of Financial Institutions (OSFI).
According to several experts, this guideline is appropriate in large cities like Vancouver, Calgary, Edmonton, Winnipeg, Toronto or Montreal. However, in small or medium cities, it will be catastrophic. It runs counter to proper economic management for the average worker who managed with some difficulty to save $25,000 or $30,000 as a down payment to purchase a house, and whose loan will not be guaranteed by the Canada Mortgage and Housing Corporation. The banks cannot sell it to the corporation. The banks will offer him funding at a much higher interest rate, that is to say twice or maybe even three times higher.
Savers will be penalized, if they did not, like in the tale of the ant and the grasshopper, save 5 per cent of the value of their house. I am not talking about houses of $500,000 or $700,000. In the regions, there are houses worth $280,000 or $300,000. Purchasers invest 5 per cent of the amount, and then the Canada Mortgage and Housing Corporation (CMHC) insures them immediately, and they get a very low rate. This goes against everything that has been recommended and that is mathematically possible. I think this guideline aims to slow down new construction in large cities. In small and medium Canadian cities, and in villages, the application of this guideline will be disastrous.
You suggested borrowing the money from a family member, but if that is not an option, where will they get the money? What interest rate will they pay? The measure creates two classes of citizens: non-savers who are reaping all the benefits and savers who are being penalized. I am trying to wrap my head around the guideline.
Ms. Wilkins: I understand where you’re coming from. Clearly, the interest rate on mortgages that have mortgage loan insurance includes securitization. The cost of the mortgage has to take into account the insurance premium. To not take that into account is to overlook a significant chunk of the cost.
I understand your concern about individuals who have put aside money and are able to make a 20-per-cent down payment. I think that gives OSFI greater security, but, at the same time, it’s important to take into consideration what could happen to the lender over time in the event of a decrease in income or rise in interest rates.
In the short term, exit options are certainly available in a number of situations. You are absolutely right that not everyone can rely on family to borrow money. However, for the sake of people’s financial stability, recession and job loss scenarios, for instance, have to be taken into account. In such a case, they may have extreme difficulty meeting their obligations. We saw what happened in the U.S. It’s nice to own your own home, but we saw how painful it can be to lose it.
A number of aspects come into play. It is not part of our mandate to make a determination on that aspect; it reflects social policy decisions made by the government. The only thing we do is analyze the relevant effects on the rate of inflation.
[English]
Senator Tkachuk: Senator Moncion, you have two questions. But remember that Senator Wetston took two, one of which was yours.
Senator Moncion: So I can give him the other one?
Senator Tkachuk: I might allow that in the second round. Go ahead, Senator Moncion.
Senator Moncion: My question is about the unregulated business of mortgages in Canada. I know that you can monitor the regulated mortgage lenders, but I think the unregulated mortgage lenders are a little bit more difficult to monitor. Some shadow banking companies do mortgages at 19 per cent so they’re out of the B-20 rule and they’re out of the interest rate at 4.99 where lenders will qualify and they contribute to the indeptedness of households.
Since you can’t monitor these groups, how do they factor into Canada’s GDP? Where are they in your analysis?
Mr. Poloz: They’re deep in the background and, of course, quite small. If we’re thinking about it from a financial stability standpoint, you ask if someone is in one of these examples the senator is giving where people fail to qualify given the new rules, do they find their way to an alternative lender of the sort you’re describing? Those lenders are basically pricing their loans to the risks that they perceive, whereas the rest of the market has a lot of competition around qualified borrowers. We’re all more or less treated the same throughout the system.
If you’re not a qualified borrower, then of course you’re a higher risk borrower and that’s why you hear things like high rates of interest. So it’s doubtful that someone who doesn’t have the resources to qualify under a set of rules will feel comfortable paying so much more in order to achieve what they’re trying to do. It’s much more likely that they will adjust by either waiting or, as we’ve suggested, what seems to have happened last year is a lot of folks got into the housing market but bought something smaller, more modest or farther away from downtown to achieve their goals. That’s why it’s difficult to predict with any accuracy what effect these things will have because everyone adjusts differently.
In the case of shadow banking world, we watch developments in unregulated sectors and it’s not just in the mortgage market but in many others, and so we’re building more and more data around that. Of course, even at a global level there’s a concern that all the great work that we’ve done in response to the financial crisis to build a new architecture may not have the intended effect if unregulated parts of the financial system get all the business. At the same time, if the riskier parts go there and the part that touches the payment system, the part that is crucial for the economic functioning, then we will have achieved something nonetheless. We’ve made the part that’s crucial for the functioning of the economy much more secure, but we still need to understand what’s going on outside of that fence, absolutely.
Senator Moncion: And the scope?
Mr. Poloz: Yes. The part you’re mentioning is a prominent but a small part of that big universe of activities that lie outside that fence.
Senator Moncion: Thank you.
Senator Tkachuk: Governor, whenever I used to ask Governor Dodge about inflation and oil prices and the Canadian dollar, he would always say commodity prices govern the way the Canadian dollar goes. When commodity prices are high, the Canadian dollar is up, and when they’re low, the Canadian dollar drops. At least that’s the story I’ve been told for a long time.
Despite the monetary report to the end of July saying how great things are, in August we actually had a contraction, so something fell off the wagon there. And we decoupled the falling of the dollar. Oil prices have gone up substantially. I think they are close to $55 barrel now, but the Canadian dollar has gone in the opposite direction. Can you give me another economics lesson and tell me why that has decoupled, it seems, from what I’ve been hearing from the Bank of Canada forever?
Mr. Poloz: You don’t need to throw away your old economics lessons because they are still true. What’s important to understand is that the Canadian dollar is influenced by lots of things, but at any given point in time, say, in a month or two-month period, it’s influenced by whatever happens to be moving the most out of that list of things.
When oil prices fell from $100 to almost $35 or$37 or whatever that low point was, was there any doubt in your mind that it was pushing the Canadian dollar down at exactly the same time? Of course not. If you draw the charts of the long history of the last 20 years or 30 years, you’ll see a very close correspondence between movements in oil prices and the Canadian dollar.
There are periods when there are gaps in that relationship and it will turn out that other commodity prices were moving differently from oil prices during those gaps or, importantly, interest rates. The interest rate difference between Canada and the United States is an important determinant of the Canadian dollar at any point in time.
If you go through a period of months, what’s happened over the course of this year is oil prices have gone up to $55, but they were around $50 for quite some time. They were $45, $48, then $52 and so on.
Senator Tkachuk: But $10 is big.
Mr. Poloz: It’s big for an oil producer, but it’s not big for an economist that is trying to model the exchange rate. A $10 move is usually in the order of 2 or 3 cents on the Canadian dollar. That is the range of movement that $45 to $55 would, on average, accomplish.
The Canadian dollar can move a couple of cents for a number of reasons. One of the reasons that this happened this year was that expectations in the marketplace, as the Canadian dollar became strong during the first half of this year, about future Canadian interest rates were revised up by market participants.
When that happens the difference between projected Canadian interest rates and projected U.S. interest rates changes in a way which causes the Canadian dollar to rise. Then the economy shows signs of moderation, which, I’ll remind you, we said it would and sure enough it is. It’s moderating from an extremely rapid pace, which was clearly unsustainable, closer to what we consider to be a sustainable pace to around 2.1 per cent growth for next year, and that pace will be more sustainable and in fact it is still above potential.
That revision down in expectations has caused the opposite thing to happen. The Canadian dollar has drifted down for the last few weeks. The bottom line is oil prices are moving, yes, but other things are moving too. So you need them all in your model. If interest rates are holding constant, then it will be oil prices that do most of the acting. But if oil prices are constant, there tends to be expectations about interest rates that have their biggest influence on the dollar. So it is all true.
Senator Tkachuk: So it’s all your fault?
Mr. Poloz: No. Absolutely none of it is my fault nor Ms. Wilkins’ fault. But there’s no question that those kinds of discussions on monetary policy have expectations have an influence. They absolutely do.
It means those things are tied to the inflation target and how the economy is producing that. If our expectation for inflation a year from now were to be revised downwards, markets would assume that interest rates wouldn’t go where they used to think, so you would see an influence on the dollar when that news comes across the wire.
Senator Wetston: Speaking of models, I looked at your medium-term research plan and it starts with a discussion of the global financial crisis. It’s been 10 years or so since it began, as you know. You talk about the modelling framework. I have an interest in it. Central banks rely on their policy analysis, which you’re suggesting was insufficient. I don’t think it is the first time you have spoken about that. I know what you’re getting at, the issue of behaviour and how behavioural assumptions or analysis seems to influence the modelling assumptions.
In your interesting speech in St. John’s you reflected on this and talked about models. Models provide us with a coherent starting point, but then we need to apply real-world judgment.
Mr. Poloz: Right.
Senator Wetston: I guess there’s some relationship between behaviour and real-world judgment, but I know you’ll comment on that. I would like to know whether you have given further thought to that issue. What do you mean by that, and how do you think the modelling processes could be revised or adapted to these behavioural assumption concerns that you’re raising?
Mr. Poloz: Let me start and then I’ll turn it over to Ms. Wilkins who is responsible for our research programs at the bank.
The fact is that models, as you’ve described, are absolutely indispensable in this day and age in order to actually have a conversation about monetary policy. It’s always been thus, but in the past models were less able to fill that role. In the last 30 years, incredible strides have been made in the modelling we use compared to when I started at the bank in the late 1970s or early 1980s. The models are far superior to what we were working with then.
The characteristic that I’ll put emphasis on is the one that you mentioned, which is coherence. When we’re using a model, it’s not about a forecasting contest and it’s not about shading your judgment to get GDP to 2.1 or 2.4. We often have these colourful debates among economists about those decimal points, when none of us has the degree of knowledge that is necessary to actually pinpoint that with our models. What our models do for monetary policy is to allow us to make sure that all the pieces of the forecast, including our policy, fit together in a coherent way. You can’t just choose a GDP forecast and choose an inflation forecast and an interest rate forecast independently, or at least you shouldn’t. I shouldn’t say you can’t because many people do so. It’s important for us that we have that internal coherence so that when we talk about policy we can be confident that the movements around that path have meaning.
That is only our starting point. From there we add the judgment which you allude to, which is to say the mechanics might suggest something quite different from what you actually think is reasonable because there are periods in time, such as now, where we know behaviour has changed relative to the average. The average is what the model describes over a 20- or 30-year-period, and at times it operates this way and other times it operates that way.
I’ll leave it at that and turn to Ms. Wilkins to talk a bit about our research program in that direction.
Ms. Wilkins: If you have enough energy, you can read the full research program. It has many pages and it is exciting.
I’ll talk about three areas, but one of the things we’re really focused on that’s relevant today is actually how the financial part of the system reacts or interacts with the rest of the economy. We also recognize when we get to behaviour that the macro economy is actually made up of different people that have small firms or big firms. Some people are borrowers with five-year mortgages; some are savers and don’t have a mortgage at all. Some people have a lower income and more stable employment than others.
That kind of diversity, not necessarily regional — although they do go across regions — can be important to macroeconomic outcomes. It’s hard to model, but it’s certainly one of our major objectives. We achieved one of our objectives recently with the third version of ToTEM, our workhorse model, to model borrowers more completely and take into account some of the things I just said about their loan to value, the tenure of their mortgage, the size of mortgages and things like that. It will help us understand what will happen when you increase interest rates, how it runs through the economy, and does it have more of an effect than it did in the past, and answers some of the questions about the right level and speed to conduct interest rate changes.
Another big bucket is related to behaviour. It’s not about building a big, dynamic macroeconomic model. It is about understanding how people react and form expectations. These modelling approaches may be using a lab where you do experiments with real people. There are other questions we want answers to, like using cash outside of the monetary policy role. How do people adopt different payment technologies that are out there?
The final thing, which of course we are doing, is related to Big Data. We tend to use the data that has traditionally been used from Stats Can and other places that are prepared weekly or daily by different people. But there’s this great opportunity with digitalization to make use of different data sources to get more timely, real-time forecasts for things like inflation, for example, but also other things.
Again, that’s another way through Big Data to understand behaviours because it’s more disaggregated and more timely. It’s a great investment and it’s aimed at being better informed in terms of our own policies and also being able to contribute when we’re at different policy tables, either domestically or internationally.
[Translation]
Senator Carignan: There’s been a lot of talk about the level of household debt and the rise in property prices. Given the increase in the level of household debt, young families are renting their home rather than buying one over the longer term. It’s a trend that seems to be gaining steam.
As far as the level of household debt is concerned, do you have some way to measure that with your models?
Ms. Wilkins: The source of household debt is the key factor in our models. Is it a mortgage or a home equity line of credit?
The rental rate, for its part, is another important factor in our macroeconomic modelling, in that it affects either household debt or the consumer price index for goods and services. When the consumer price index is set, it actually takes into account the fact that housing prices are tied to whether people own or rent their homes.
[English]
Senator Enverga: Thank you once again for being here today. In response to Senator Tkachuk's question with regard to our dollar going lower, you mentioned that it’s the influence of lots of things. During the time it’s going lower, is it to do with economic confidence or something going on with international trading? I’m wondering about this lowering. It was happening a few days ago; it started maybe last week. It was going down at the same time that we were having issues with our finance minister.
Does this impact international confidence in our economy? Are there issues with regard to that kind of thing?
Mr. Poloz: Well, certainly, if we look at very short-term fluctuations in the currency, on any given day one could say the dollar went up today because of this, because it’s the only other thing we can think of that happened that day, and the next day, something else happens and we can say that.
As economists, we tend to look for more lasting movements. For example, regarding Senator Tkachuk’s question about the influence of oil prices, it’s very clear you can’t use daily or very short-term movements and expect it to fit. It’s a smooth process, and the economy tends to react to oil prices in almost train tracks like fashion when you limit yourself to the large and prolonged movements. That’s one of my favourite charts in economics. It’s a very reliable relationship.
But, as I said, we have periods where these other things may have an effect. You mentioned confidence.
For me, when I look at the events of this past year, I look to one of the questions we had before about what happens if there’s a major tax change or fiscal package in the United States. We started the year with a lot of talk in markets about what the new administration would do with that. What were the consequences of that? Well, the U.S. dollar strengthened quite a lot against a range of currencies over the course of that because everyone was expecting this to strengthen the U.S. economy and expected interest rates to be consistent with that.
Over the course of the year, the reverse has happened. The U.S. dollar has weakened against a wide range of currencies, not just the Canadian dollar. This takes us to July or thereabouts.
The first six months of the year, every currency in the world was going up at the same time, so clearly it’s not something inside Canada that’s causing that. It’s something outside that’s causing that. I wouldn’t put a number on it but would say if we rose by five cents in that period, it could be half of it, the sort of thing that was caused by something outside and the rest caused by something Canadian — firmer oil prices or the story I told before about interest rates.
Where does confidence fit into that? Someone might say, “I think that has to do with confidence.” Well, it could, because if the economy was strong, as it was in the first half of the year, that adds to people’s confidence and that translates into their expectations about where interest rates will go. If the economy was weak, you’d expect possibly interest rates to be lower in the future than otherwise, and if the economy is strong you expect the opposite.
Regarding those confidence effects, you could think of it that way. It’s part of the channel, that sequence of events that leads to a fluctuation in the dollar.
Senator Enverga: So it’s possible?
Mr. Poloz: Absolutely, it’s possible, yet episodic explanations are not that much use to an economist. We’re looking for something which is more lasting, and the rest is up and down, up and down, so we try to see through that.
Senator Tkachuk: Well, we’ll see how all that goes up with the next report in the spring.
Mr. Poloz and Ms. Wilkins, thank you so much. It was a great hour and a half, and with that, the meeting is adjourned.
Mr. Poloz: It was a pleasure, thank you, sir.
(The committee adjourned.)