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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue No. 39 - Evidence - April 25, 2018


OTTAWA, Wednesday, April 25, 2018

The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:19 p.m. to study the present state of the domestic and international financial system.

Senator Douglas Black (Chair) in the chair.

[English]

The Chair: Good afternoon and welcome colleagues and members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce either here in the room or listening via the Web.

My name is Doug Black, I am a senator from Alberta, and I am chair of the committee. I am going to ask the committee members who are present here today to introduce themselves.

Senator Wallin: Pamela Wallin from Saskatchewan.

[Translation]

Senator Ringuette: Pierrette Ringuette from New Brunswick.

[English]

Senator Marwah: Sarabjit Marwah, Ontario.

Senator Unger: Betty Unger, Alberta.

Senator Wetston: Howard Wetston, Ontario.

Senator Tkachuk: David Tkachuk, Saskatchewan.

Senator Stewart Olsen: Carolyn Stewart Olsen, New Brunswick.

Senator Frum: Linda Frum, Ontario.

The Chair: Thank you very much, colleagues. As I always mention, we are very ably assisted by our clerk and our analyst.

I am very pleased, of course, to welcome back Governor Poloz and Senior Deputy Governor Carolyn Wilkins before our committee. Our last meeting with them occurred on November 1, when we discussed the fall Monetary Policy Report.

So thank you both very much for being with us. We look forward to your update on the Monetary Policy Report dated April 2018, which was released last week. Governor, the floor is yours.

Stephen S. Poloz, Governor, Bank of Canada: Good afternoon, Mr. Chair and committee members. I’m delighted to be here. Senior Deputy Governor Wilkins and I am pleased to be back before you today to discuss the bank’s Monetary Policy Report, the MPR, which we published last week.

When we were last here at the beginning of November, we were seeing signs that the Canadian economy was moderating after what had proved to be an exceptionally strong first half of the year. That moderation turned out to be greater and to last even longer than we had expected. Still, it is important to recognize that inflation is on target and the economy is operating close to potential. That statement alone underscores the considerable progress that has been seen in the economy over the past year.

The slower-than-expected growth in the early part of this year reflected two principal issues. First, housing markets reacted to the announcement of new mortgage guidelines and other policy measures by pulling forward lots of transactions into the fourth quarter of last year. That gave us a strong fourth quarter from a housing point of view, but it led to a slow down in the first quarter that should naturally reverse in time.

Secondly, we saw weaker-than-expected exports during the first quarter. This weakness was caused in large part by various transportation bottlenecks. Some of this export weakness should also reverse as the year goes on. So after a lacklustre start to the year, we project a strong rebound in the second quarter. All told, we expect the economy will grow by 2 per cent this year and at a rate slightly above its potential growth rate for the next three years, supported of course by both monetary and fiscal policies.

[Translation]

The composition of growth should shift over the period, with a decline in the contribution from household spending and a larger contribution from business investment and exports.

Inflation should remain somewhat above the 2 per cent target this year, boosted by temporary factors. These factors include higher gasoline prices and increases to the minimum wage in some provinces. Their impact should naturally unwind over time, returning inflation to 2 per cent in 2019.

Of course, this outlook is subject to several important risks, and a number of key uncertainties continue to cloud the future, as was the case in November.

[English]

Now the four main uncertainties around the outlook for inflation are the same ones we discussed six months ago, but progress has been made on some of them.

First, in terms of economic potential, our annual review led us to conclude that the economy currently has more capacity than we previously thought. As well, this capacity is growing at a faster pace than we expected. This means we have a little more room for economic demand to grow before inflationary pressures start to build. That said, some firms, particularly exporters, are operating at their capacity limits but are hesitating to invest in new capacity. This hesitation may be due to trade uncertainty, perhaps transportation bottlenecks or, also mentioned to us, shortages of skilled workers or possibly other reasons. Regardless, it is limiting growth of our exports and investment and, therefore, economic capacity.

The second source of uncertainty concerns the dynamics of inflation. Here, recent data have been reassuring. Inflation measures, including our various core measures, have been behaving very much as forecast and are consistent with an economy that’s operating with very little slack. This gives us increased confidence that our inflation models are working well.

The third area of uncertainty is about wages. The data here are also encouraging. Wage growth has picked up significantly over the past 18 months, approaching the 3 per cent growth rate one would expect from an economy running at capacity. However, the most recent figures are being boosted temporarily by minimum wage increases in some provinces.

The fourth source of uncertainty is the increased sensitivity of the economy to higher interest rates, given elevated levels of household debt. The concern is that as interest rates rise, the share of household income going to service debt will also rise. This will leave less to spend on other goods and services and put downward pressure on inflation. It will take us more time to assess this issue, particularly because new mortgage guidelines are currently affecting the housing market and mortgage lending. However, the growth of household borrowing is slowing, which is consistent with the idea that consumers are starting to adjust to higher interest rates and new mortgage rules.

So, as you can see, there has been some progress on these four key areas of uncertainty, particularly the dynamics of inflation and wage growth. This progress reinforces our view that higher interest rates will be warranted over time, although some degree of monetary policy accommodation will likely still be needed to keep inflation on target. The Bank of Canada will continue to monitor the economy’s sensitivity to interest rate movements and the evolution of economic capacity. In this context, Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data.

With that, Mr. Chair, Senior Deputy Governor Wilkins and I will be happy to answer questions.

The Chair: Thank you, governor. Colleagues, we have a list. I will ask you to keep to one question, and then we will have a second round because there is great interest here. We will start with the deputy chair, Senator Stewart Olsen.

Senator Stewart Olsen: Thank you, chair, and thank you governor and Ms. Wilkins for being here. I am interested in your fairly rosy picture of how the Canadian economy is doing. I have to share with you that that is not my impression, especially if you live in New Brunswick and you see stores closed and mall after mall at half capacity and people not doing well in the jobs market.

Your Monetary Policy Report was very interesting. On page 19, you say that “. . . limited pipeline and rail capacity out of Western Canada could discourage longer-term investment in the oil sands.” Can you give us a sense of how much the pipeline and rail capacity problems are hurting the Canadian economy?

Mr. Poloz: When we describe the economy, as you say, in rosy terms, that is more like finally positive terms. It means that as a macro statement for the economy as a whole, it has put the adjustments to the oil price shock behind us, but we still have softness in several areas of the country. We’re not all operating at the same level. Structural adjustments will go on for several years underneath the surface. That’s just the diverse nature of our economy, that not everything moves at the same time. Overall, we’re quite encouraged and certainly much more encouraged than we were the last time that we were here.

In terms of these bottlenecks that I referred to in my opening statement, mostly we think that the rail capacity side was primarily a weather-related issue. During the winter, trains were running more slowly and with fewer cars on each, so particularly in the agricultural sector there is a buildup of inventory that still needs to be delivered. That’s also the case in other industries such as the chemical industries that rely a lot on trains. This is the part we consider to be temporary. As the weather is improving, speeds are picking up, and those backlogs will get cleared hopefully in the second quarter but perhaps as late as into the summer. In any case, it’s temporary from the macroeconomic point of view.

The pipeline capacity question is a complex one. We’re all familiar with the issue, and it’s a heated issue. I don’t want to express a lot of views on that. It’s really not our thing. But in terms of the macro economy, our most important consideration here is that the lack of pipeline capacity is causing Canadian producers of the marginal oil, the new supply, when they can’t get a committed pipeline to go by any other means, which is often rail. I’m hearing even using trucks, keeping the product moving. And they’re getting, of course, a lower price for that. That lower price is the price that matters for any new development that would occur; therefore, investment is not projected to increase in that space until some of that situation changes.

In our forecast, we always assume a constant price of oil just because it’s so risky to choose prices. And with that constant price of oil, which is at a significant discount to WTI pricing, our modelling tells us there will be no new investment from here, just a flat level of investment. It’s still investment, but it’s not growing; I want to make sure I’m clear on that.

That was pretty strong investment during 2017, especially during the second half as things came back on stream, and that investment has now fallen off in the first quarter. It is one of the reasons why the first quarter is weaker. There is a lot of debate on how much that pipeline capacity is costing us every day. It’s a very complicated question, and I suggest we shouldn’t take any of those estimates as pure and simple to calculate.

Something like half of Canada’s production is exposed to that lower price. It’s heavy oil, of course. But some companies have full upstream and downstream structure, and so they’re less exposed to it. Others have committed pipeline capacity, and sometimes the gap is actually paid to a Canadian transportation company. So again, some of it is staying in the Canadian economy but not received by the oil company. As I said, it is a very complicated question. For us, it’s mainly about the future, which is the investment impact.

Senator Wallin: Thank you both for being here. My question comes from comments on page 20:

The steady downtrend in Canada’s share of US non-energy goods imports has not slowed despite the depreciation of the Canadian dollar in recent years and is indicative of the ongoing competitiveness challenges that some Canadian exporters face.

We have had, and you have had, soft dollar easy money at home. Competitiveness just sits there. What fix are you proposing, other than changing those two other approaches?

Mr. Poloz: This observation is for us to try to understand why exports have underperformed.

I think it’s important to acknowledge, first of all, that that decline in market share which we referred to there, Canada’s share of U.S. imports, has been declining for a really long time. It’s not a recent phenomenon. It is primarily because of the quite high growth in China’s share, but also other countries’.

With the competitiveness issues, our lens there is mainly what companies tell us through our survey and through conversations. And perhaps Ms. Wilkins would like to walk through some of these things that we received from companies.

Carolyn A. Wilkins, Senior Deputy Governor, Bank of Canada: We have a number of ways to talk with companies, including our Business Outlook Survey, but there are other bilateral and multilateral meetings that we have. It’s consistent, over time, the types of things business people will tell us. It depends a little bit on the industry, but the common themes have to do with the cost of doing business, whether it’s electricity, paperwork, uncertainty about whether you will get a permit and how long that will take so that you can get the payoff to your investment.

Of course, more recently, there is the uncertainty around the trade agreement with the United States, NAFTA. Businesses are telling us that even though they’re very positive about the need to invest, and you see that in our numbers, a number of them are saying, “If it’s domestic purposes, we will go ahead and do it. Others are doing it.” And another significant number are saying, “I’m going to wait, or I’m going to make that investment in the U.S. instead, especially if I already have a footprint there.”

A number of factors are restraining investment. And if you don’t invest in new capacity and you have the demand there in the U.S., you can’t fulfill the demand because you don’t have the capacity. Labour shortages in some places are another issue. You can see in one of the charts in the Monetary Policy Report that many of these exporting firms and sectors that are doing well are actually near historical averages in terms of capacity. So normally it would be the time you invest, so we will see in the data how much of that materializes.

In the non-energy space, we do have some investment in our outlook. It’s less than it would have been otherwise, in large part because of the uncertainty with respect to NAFTA.

Senator Tkachuk: Welcome, governor. In a speech a few months ago, you said the following:

While about 91 per cent of prime-age men participate in the labour force, the rate for women is only about 83 per cent.

History suggests that this gap can narrow. Consider Quebec, where, 20 years ago, the prime-age female participation rate was about 74 per cent. The provincial government identified barriers keeping women out of the workforce and acted to reduce them, particularly by lowering the cost of child care and extending parental leave provisions. . . . Today, Quebec’s prime-age female participation rate is about 87 per cent.

That is a difference of 4 per cent over the national average.

You continued:

If we could simply bring the participation rate of prime-age women in the rest of Canada up to the level in Quebec, we could add almost 300,000 people to our country’s workforce. The recent Federal Budget introduced some new measures in this direction.

To me, this sounds like an implicit endorsement of the Trudeau government’s plan, which you said has been stimulative to the economy. Elsewhere, you have been heard to endorse this government’s deficit spending outside of a recession, saying roughly we don’t need to worry about deficits at this time. You have also endorsed the spending on infrastructure. As Terence Corcoran wrote, “From Ottawa’s deficits to Ontario’s childcare plan to big pension spending on infrastructure, politicians can now turn to Poloz as an independent authority for approval.”

As far as I know, governor, your job is inflation targeting, monetary policy, and more important than anything, the people need to have confidence that you’re an independent governor. And I think you may be straying a little beyond your mandate with these statements and creating a perception that you are a little too close to the government in power.

Mr. Poloz: Sorry, is there a question?

Senator Tkachuk: That is the question; I’d like you to comment on it. I think you are straying too far.

Mr. Poloz: I would be happy to comment on that, and if you have anything to add, you can do so.

Our job, as you say, is inflation targeting. And in order to do inflation targeting, we must understand how the economy is evolving. So one of the things we cannot ignore is what is fiscal policy doing. For example, what is labour force participation doing? How well do new policies affect labour force participation? Those are very objective questions which we need to understand in order to do our job, so we’re not hesitant to go out in public and discuss how those things are affecting the economic outlook and therefore how they come into our decision-making process.

It would be bizarre for me to ignore fiscal policy, for example, in trying to understand how the economy will behave over the next two years, relative to our inflation target. It has to be incorporated in our models.

Let’s look at some of the things you quoted at me: I endorsed a government plan. Rather, what I have done is the arithmetic around what the government plan will have as impact on the economy and how it figures into our calculation of the risks up or down on the inflation target. That’s all it’s there for.

So if I say that the Canada Child Benefit added almost 1 per cent to Canada’s GDP over the first year, which is I think what I said — 0.5 per cent the first year — that’s an important input into our understanding of the economy. It’s not an endorsement. It is a comment on exactly what we think the role is that it’s playing.

With infrastructure, it’s the same thing, slower than first announced but still having an impact on the economy. It’s important that we include that. It would be bizarre to ignore it. People have a right to understand how these things all fit together.

I think given the focus in our analysis of Canada’s economic supply, our capacity, that, of course, is driven by a combination of investment and labour force growth. It is a relatively low number long term. We have now upgraded it to about 1.8 per cent trend growth. A few months ago it was as low as 1.4 or 1.5 per cent, so it’s been bumped up from the latest data we received from StatsCan, which isn’t very good but it’s still below 2 per cent as a trend line.

How would we adjust that trend line? Monetary policy has no role, no ability to adjust the trend line. How might the trend line change? One of the meaningful ways would be if there were increased labour force participation by various groups. But the biggest gap between where we are in labour force participation and where we could be, as evidenced by developments in specific markets, is in participation by women.

One observation in that speech was to illustrate for people what sort of potential there might be in the economy under different sets of structural policies. Quebec offers a case study that gives you a sense of how much labour force participation might rise. As we do the arithmetic around that, if we had a similar sort of participation across the country, it would be another 300,000 jobs. That’s like two years’ worth of growth out of literally thin air.

Of course, the media is free to interpret these observations as endorsements, if they choose. As you can tell, I reject that interpretation, very firmly, actually, because I’m very careful not to. So I hope you listen to what we say to you and not what Terence Corcoran says to you.

Senator Tkachuk: I do listen to what you say to me. I have one more question. I think I get two?

The Chair: Second round, but don’t lose that question.

Senator Marwah: Welcome, governor. In your MPR you outlined various risks to the economic outlook and I think the shift toward protectionist trade, uncertainties around inflation and the sensitivity of the economy to interest rates, but there’s very little mention of the Canadian dollar. Do I conclude from that that you’re happy with the trading ring that it’s in right now?

One of the things that comes up with the rising rates in the U.S. is that the gap between Canadian and U.S. rates is increasing. We put pressure on the dollar with energy bottlenecks. Does that worry you? Or do you feel it’s just a byproduct of your other policies, that it will be what it will be?

Mr. Poloz: This is another subject on which we never express our content or discontent. In fact, what we try to do is explain, to the best of our ability, why it has done what it has done.

The big thing that has happened in the last five or six years is that oil prices have gone from around $100 to something like $60, let’s say, for WTI, $65 lately. So that decline is the main thing that has caused the dollar to move from around parity to something like 75 to 80 cents; it fluctuates somewhere in there. In the short term, all kinds of things affect the dollar from day to day, such as interest rate differentials, as you say, and, importantly, expectations of interest rate differentials, perhaps much more important than the actual ones.

So our modelling has no problem explaining the broad movements in the dollar in the ways I’ve just described, and that just becomes an input into our analysis of the economy.

When it comes to competitiveness, you may wish to add something here. An economist would look at the costs of running a business and summarize them usually in unit labour costs adjusted by the exchange rate to try and see if it costs more or less to make something in Canada versus the United States, let’s say. Even that is kind of a simplistic notion because you’re usually competing against a third country, which makes that comparison even harder to do, but most importantly, competitiveness is a much broader concept, as Ms. Wilkins was saying earlier. It’s not just the labour cost and therefore the exchange rate helping to move it around; it’s all those other things on the list like electricity costs, red tape, regulation, all those things that come into the calculus. It varies from company to company. It’s not a macro concept; it’s actually a micro concept. Do you want to add something?

Ms. Wilkins: I would just add the notion of time when it comes to competitiveness as well. When we think about fluctuations in the dollar, in a calculation you’re going to see a difference in how unit labour costs are moving in Canada versus the U.S. Of course you’re going to see that. But on a day-to-day basis, that’s not how a company thinks. They think about longer-term trends in the currency as well as longer-term prospects for the competitive environment. What’s the investment environment like? In fact, they don’t take these decisions every day. Often the investment or product mandates, especially for larger companies, come once every five or ten years.

So looking at the dollar over any shorter period of time when you’re thinking about longer-term trends, where we will end up in terms of who we’re exporting to and what kinds of products and services, to me, that is more of a longer-term structural question than any day-to-day movement in the dollar and, in fact, has a lot to say about longer-term prospects for the Canadian dollar.

Senator Wetston: Thank you for coming today. I had a little fun with your calculator. You know this Bank of Canada calculator? It’s a pretty cool device. I don’t know if everybody has tried it, but it’s pretty interesting. I do have a question that’s more relevant in a moment.

I noted that $100 for a basket of goods and services in 2016 today would cost $103.91 in 2018. I don’t have the specific date. The per cent change is 3.91. I find that change quite dramatic over a two-year period, but that just may be my view.

The reason I’m mentioning it, of course — obviously inflation targeting is an important role for the bank, a key role. I looked at your risk to the inflation outlook at the back of your report here, and I think you list five. They’re interesting to me, and I’m sure you might do this, but I can’t see it from here. How do you weight? Do you weight these in any particular way? Could I give 20 per cent through that process? Or is it even possible to be able to do that as a risk to your inflation outlook?

Mr. Poloz: It’s more complicated than that, unfortunately, and it doesn’t begin to enumerate all of the risks that are on the table when a forecaster is talking and we’re trying to figure those things out.

We’re trying to highlight the things that are most prominent in that discussion by walking through them to show you that there are things on both sides, and we have tried to balance them. So there are risks on both sides of the equation.

Perhaps you want to talk a bit about the individual ones, your favourites.

Ms. Wilkins: So it’s quite interesting. I’m smiling because we talk about this a lot. What those risks represent is just uncertainty around our outlook. We have given you what we think the most likely thing is, and then what we tell you at the end is that while these are the big things that could be different, the difficulty with weighting them is that it would be very subjective.

I think a more important difficulty is that these risks don’t occur by themselves. Some of them are kind of here. You can imagine if there was a downturn in the United States, for example, that might interact with the risk with respect to the housing market. On the other side, you can think that if animal spirits take flight in the U.S., that’s going to have implications for other risks on the upside in Canada. Because of that, what we do is we use our risk management framework and look at scenarios. We say, “If the world turns out like this, where do we want to be positioned? If the world turns out like that, where do we want to be positioned?” That can lead us to take decisions that alter the pace of what we’re planning to do or may give us actual comfort that for what we plan to do, now is the right time.

It might sound technical, but we look at those risks and apply our judgment in our risk management framework.

Senator Ringuette: Governor Poloz, please understand the Senate has been operating for 150 years, and yet we don’t have a standing committee on human resources to have an informed conversation on these issues. That being said, I have been on this committee for over 12 years, and your predecessors were here and so forth.

For the first time, I’m hearing transportation bottlenecks. Earlier you talked about trains and pipelines. What about roads, bridges, airports, seaports and border crossings? How detailed is your data on the cause of these bottlenecks? At the end of the day, we’re looking, in the next decade, at $1 billion worth of investment.

So how detailed are the data you have in regard to this issue having a negative impact on our economy?

Mr. Poloz: Well, I think any form of infrastructure which is found to be insufficient is something which limits our growth or our ability to grow our economy, and it’s why it’s pretty easy for an economist or central banker to say more infrastructure will have a growth impact on the economy. It’s not just the spending on the jobs, the creation of the infrastructure, but rather the result which makes it easier for businesses to grow their business.

Senator Ringuette: But you’re talking about bottlenecks, so therefore there are priorities there.

Mr. Poloz: We don’t have detailed micro data on that. What’s happening is that in this past cycle, we observed that exports in several categories had fallen a lot compared to where we expected they would be, so you can actually get into inquiry mode and find out what’s going on with that. Right off the bat, Statistics Canada says actually the grain wasn’t moving and it’s because of bad weather, and we know the trains were running more slowly. A story emerges. We confirm that with our survey and our conversations with our companies.

So it becomes a story around bottlenecks, and that helps us to observe, okay, that explains why that was so weak and means we can be assured it’s not fundamental and will improve as the bottlenecks ease. In contrast, the bottlenecks on the pipeline side require capacity in order for them to ease. It’s not the same as bad weather affecting the trains.

Those are the two areas where we have specific anecdotal evidence from the companies that talk to us. We’re translating it and putting it into our macro story, but we don’t have micro data on the range of bottlenecks that you mentioned. It comes to light if the data look funny in some way and we do a deeper investigation into them.

[Translation]

Senator Bellemare: I will ask you technical questions as my colleagues have done. I would like to congratulate you on the way monetary policy is being conducted. It is in keeping with the mandate in the preamble of the Bank of Canada Act, which states that monetary policy must be conducted “generally to promote the economic and financial welfare of Canada.”

Since 1991, you have been specifically targeting inflation rates. For the moment, the monetary policy seems to go hand in hand with a robust labour market and a declining unemployment rate. In your current models, is the Phillips curve once used for managing monetary policy flat? The sensitivity of the decline in the unemployment rate to the consumer price index is very low. Can we hope that it will be maintained?

Mr. Poloz: That’s an excellent question, and your comments go straight to the heart of the matter. First, we have confidence in our inflation models. This is a traditional Phillips curve. It may be flatter than before, that is quite possible. At the same time, it is difficult to determine whether it is actually a curve. It’s more like a line graph. There is evidence on the Phillips curve for wages. There is a curve, but it is not as clear in the context of inflation.

In our opinion, the inflation risk may accelerate slightly. Of course, for the moment, the economy is close to its full potential. Last year, we were more nervous about inflationary expectations because our special measures were below target. They were almost at 1.2 or 1.3, and so on.

We analyzed the data very carefully and concluded that it is temporary. Sometimes temporary things can be explained. There is an inflation rate. We have tried other hypotheses. We found no evidence for other hypotheses. Finally, for the 2018 forecast, we were hoping for an inflation rate of 2 per cent. Those are the models that we have established in our forecasts. As I mentioned in my introduction, we gained more confidence during this period.

Do you want to add a comment?

Ms. Wilkins: No, your answer is good.

[English]

Senator Unger: Thank you for being here. I wonder if you include in your modelling issues like this, and I’m quoting Tim McMillan, President and CEO of the Canadian Association of Petroleum Producers:

The reputation we have around the world today is a country that can’t get things done. As I’m meeting with some of our members that are foreign companies and others looking at Canada as a potential investment environment, they will raise with me that Canada can’t get projects done.

I agree with Senator Tkachuk, because it seems to be the policies of today’s government. You cancelled Northern Gateway after it was approved. Energy East was cancelled and didn’t even make it through the regulatory process, and that was the new energy assessment board with their upstream and downstream comments. The LNG facility in the pacific northwest was cancelled and couldn’t go forward in Canada. Aurora LNG — it goes on.

You also say in your paper, “Investment in new projects is being held back by reduced competitiveness . . . .” But “. . . the Bank forecasts that investment will decrease in 2018 and remain roughly flat thereafter.”

So have you written off the industries that were the economic engine of Canada for more than a decade?

Mr. Poloz: So, if I can answer the last part because that’s really the big question, the answer is no, of course not. What we are doing in our outlook is suggesting that, with the discount that energy companies and oil producers are receiving at this stage, there is unlikely to be growth in investment in that sector. But it is still a sector that is contributing significantly to the economy. Of course, there will be maintenance investment, but no new projects seem likely at that kind of pricing level.

The comments that you laid out there are broader than just the energy sector. We are getting commentary like that from the companies that we talk to. We certainly don’t ignore this, but fitting it into the forecast and, therefore, somehow creating the analysis that we need in order to take it into account in monetary policy is more challenging because it’s not something you look up. It’s not data. It’s sentiment. We can walk through a bit how we walk through that process of taking those anecdotes and formalizing it.

Ms. Wilkins: We take quite a detailed look at different export sectors because, for their economic concerns, whether they invest, whether they do well internationally, there are some common factors, but there are also other factors that are more particular to that particular industry.

We’ve already covered the energy sector quite well. I would say that where we do have some growth in investment is in the non-energy sector over the forecast horizon, and that’s coming from the fact that many industries, both domestic and export-oriented, are at their capacity. They have all of the incentives — and they tell us that they do — to invest. What I said earlier is that we have, nonetheless, marked that down more than our models tell us because there is this other side of it in terms of their ability to have a return on those investments. So, with respect to getting things done, one thing that businesses might tell us is that, if you’re in the fishing industry or in mining, the time to get a project approved, for example, and get the right permits matters in terms of what the rate of return is going to be on that investment relative to somewhere else in the world. We do take that into account. It’s going to be judgment that allows us to do that. There is no model that’s going to tell you that, but we do look at different areas.

One area that I would say is doing relatively well is services and, in particular, ICT services. So it’s quite important not to paint all export-oriented industries with the same brush.

Senator Unger: The governor didn’t really answer any first question, which I felt was more important. That is that Canada’s reputation has become that we’re not a good place to invest because we can’t get things done.

Mr. Poloz: I can report that companies are saying things like that to us through our surveys. Ms. Wilkins is outlining how we try to take that information on board, and it is in the investment outlook for the economy. Our forecast for Canadian investment is significantly lower than it would be without factors like that. The one that people mentioned most is the uncertainty around NAFTA. That’s a very widespread issue for people. But they’re also mentioning the bottlenecks, the approvals process, the inability to get things approved, et cetera.

So that summarizes the permit risk, if you like. People are talking about that. We’ve tried to capture that sentiment, but, if you take all of that into consideration, business sentiment on investment still is pretty strong. So all we’re saying is that it’s not as strong as it would be without those issues, and that’s all we have to work with in terms of data.

The Chair: Before we go to second round, governor, I have a question, if I may. I read with interest, of course, your statement of April 18, and there’s a question of something I just don’t understand and want to put back to you. I know you can help me with this. You indicated in the statement, as you have indicated to us today, that many firms are operating at or above their capacity but are hesitating to invest in new capacity, given the uncertainty of NAFTA, as you’ve mentioned, and the bottlenecks and the shortage of skilled workers, as you’ve also mentioned. And you went on to say:

This reluctance to expand capacity . . . also serves to limit growth in our exports.

It is possible that this represents a structural change in the Canadian economy, and the resolution would lie beyond the capability of monetary policy.

What does that mean?

Mr. Poloz: It’s an excellent question. In the first instance of exports, what we’ve laid out is a case where, because of capacity constraints mixed with the uncertainties that firms face, we are getting sort of a cap on both growth in investment and growth in exports at the same time for, apparently, the same underlying reason. This is supported by quite a lot of conversations with companies.

If you’re trying to figure out how the economy grows, it’s consumption plus investment plus exports. If investment and exports are both being held back by something, it’s having two effects, not just the one. So that, when it first comes up, we interpret it as less demand in the economy than we otherwise would have. If the economy has less demand than it otherwise would have, that would normally put downward pressure on inflation. In other words, it would represent a downside risk to the inflation outlook, as we have it, and in that condition, that would be one argument to put on the table for why interest rates should be lower than they are or perhaps stay where they are longer than they otherwise would. That’s how it feeds through into the policy decision.

That last line is to, in effect, put a warning on the table, which is that, if those things go on for a long time, what happens is that it’s not just a demand effect but also a supply effect. So, to the extent that companies never put that investment back in place that they were planning to, Canada’s potential will be lower than we are assuming. So we have less demand and less supply. That combination, therefore, becomes an ambiguous impact on the inflation outlook. It could even have no effect, perhaps, but it would take a lot of analysis to make the guess, if you like, about the net effect. But the important thing is that if it becomes structural, it means that the economy is fundamentally smaller a few years later because of that lower investment in capacity, and the demand is lower for the same reason. There’s no ultimate effect on the inflation outlook, which means it’s no longer an issue for the inflation target. Therefore, it’s not monetary policy that will respond to that, because the inflation target would remain intact. It will then be only a question of what we call structural policies, which would be those competitive issues that are leading to those decisions.

The Chair: I would read that to be that we run the risk of a shrinking economy.

Mr. Poloz: An economy that would grow less than we are hoping for. So not necessarily shrinking, but, yes, relative to that long-term outlook that we had, potential growth, which we have as 1.8, could be 1.6 or some other number like that as a result of that kind of thing. That would mean the inflation outlook wouldn’t really be affected by it because it would be both supply and demand at the same time.

The Chair: Thank you very much, governor. The fun continues. We’re moving on to a second round.

Senator Wallin: I would like to go to the question of debts and deficits and the statement the other day by the former Parliamentary Budget Officer that debt on which we must pay interest has now topped $1 trillion for the first time in a $2 trillion economy. How worried does that have you?

Mr. Poloz: I believe you’re speaking of fiscal debt.

Senator Wallin: Yes.

Mr. Poloz: I’m not going to express a view, positive or negative, about debt, but I’ll explain how it actually functions in the economy. In this case we have at the federal level, by international standards, a pretty modest outstanding stock of debt. That doesn’t change the arithmetic you’re talking about that a higher interest rate means you have to service more than you have been. The other way to look at it, perhaps, is that we had a stock of debt years ago, and low interest rates made it easier to service for the last 10 years. If interest rates, as we expect, are gradually returning to normal, then debt service will, of course, rise back to levels more similar to what we’ve had in the past.

At the federal level, the stock of debt is something like 30 per cent of GDP, which, by comparison across countries, is actually quite modest; and it’s one in which I would say there’s fiscal flexibility if there were a downturn in the economy.

Senator Tkachuk: Just a follow-up question. In 2014 I think GDP growth was 2.6 per cent; in 2015 it was 0.9 per cent; in 2016 it was 1.5 per cent; I think last year it was around 3 per cent; and you predict this coming year it will be 2 per cent or less. At the same time, the government has been deficit financing.

How much of that number would you attribute to what you consider positive policies of deficit financing? In other words, if they hadn’t spent that money and they had balanced the budget, would it have had a big effect on growth? Would the growth numbers be that much different?

Mr. Poloz: Yes, they certainly would be. In 2016 — I would need to refresh my memory. Maybe Carolyn can do a little digging to get us a number of what we laid out there. The way I normally think of this is that given the downturn in the economy that resulted from the oil price shock in late 2014 and early 2015, you will recall that we reduced interest rates in two steps down to 0.5 per cent. About that time, we began to have the stimulus that came from the Canada Child Benefit. This turned out to be a fairly significant bump to consumption spending in Canada.

I wouldn’t want to redo the whole experiment in my head, but I do think that fiscal stimulus helped us avoid a much lower path for interest rates — zero, or possibly even lower. You will recall, perhaps, in the fall of 2016 I gave a speech exploring how negative interest rates would work in the Canadian economy, which, of course, is not a place we’d ever want to go. That would imply that the economy was in quite a dire situation. Fortunately, it turned out we didn’t have to, and that was the bottom for interest rates, and interest rates have risen.

Of course, a lot of other things move and would move differently if the fiscal path and interest rate path were different. You would need a full-model simulation to show you what the counterfactual would look like. Of course, interest rates would have responded to a much weaker economy, so they wouldn’t have been held the same as they actually were. That’s what makes the question hard to answer.

Senator Ringuette: A few years ago, this committee did quite a study in regard to the bitcoin phenomenon. One of our conclusions was that the technology was providing a lot of promise. At that time, I remember that the Bank of Canada said they were looking into how they could use that technology. I would like to have an update on where the Bank of Canada is in regard to this issue.

Mr. Poloz: Excellent question. The good news for me is I’m sitting beside a global expert on this range of territory, world renowned, so off you go.

Ms. Wilkins: I don’t know what to say to that, but divide that statement in 10. Thank you.

We had the same view that, when you think of bitcoin, that’s one thing, but when you think about the underlying technology and the kinds of efficiency gains you might get from it or increased security or resilience of the systems it was applied to, it was worth exploring. From the Bank of Canada’s point of view, given our role in payment clearing and settlement systems, and the financial system more generally, we thought the best approach for us was to do it directly through some experiments, because then we would really learn on the ground what it was as it’s developing. People call it blockchain, but it’s like books; there are different versions. Unless you have read a few carefully, you’re not really going to know what it is.

We’ve done a couple of experiments already with Payments Canada and the six Canadian banks to look at what it would be to replace our current Large Value Transfer System, where all the big payments are, with a couple of versions of distributed ledger technology. We published a report after that to say that it could work and it could pass our standards over time, but there was no business case for it. It wasn’t more efficient than the system we have, and there are a lot of kinks in terms of risks we would need to see worked out.

At the same time, we realized that maybe more of the benefits could come from building out payments processes where there were real inefficiencies. Our Large Value Transfer System is efficient already. However, if you think about securities trading — so you buy equity and it settles in a couple of days and people have your money for a couple of days. They make money on that, by the way. It’s called float.

We thought let’s work with TMX Group and see if we can have a delivery versus payment system. So payment and delivery would happen the same day using another version of this. That one is under way.

Another experiment we have now is with the Monetary Authority of Singapore, where we’re looking at cross-border payments. That’s another area of payments where there are a lot of intermediaries, and they get a cut every time.

The purpose of these is to learn. It’s not to take any product to market. But certainly it’s paying off in a number of ways in terms of our stock of knowledge and also helping the private sector understand what would be the concern of a major player in the financial system, like a central bank.

[Translation]

Senator Bellemare: Let me bring you more into the future. In 2015, the United Nations adopted the 2030 Agenda, with 17 goals in the environmental, social and economic areas. Those 17 goals are interrelated. If all the countries participate in this initiative at the same time, there will be investments in green energy, education and health. However, we do not know what the central banks think of this program. It’s very optimistic, but will the central banks try to accommodate this program or will they put their foot on the brakes?

Mr. Poloz: That’s an interesting question. We accept the world as it is. Perhaps Ms. Wilkins could go into more detail.

Ms. Wilkins: It is a very important program. Some of its goals are similar to the Bank of Canada’s mission of promoting Canada’s economic and financial well-being. Of course, we are doing our duty in terms of inflation on a daily basis. Generally speaking, people think that the idea of prosperity is very far removed. In fact, it is the basis of economic and financial stability. If we look at the current research, we see that, since we started targeting inflation, the economy is more stable, even with the financial crisis. A recession affects low-income people the most. This is normal, because their jobs are usually less secure. This is one of the ways we contribute on a daily basis.

Our role in financial stability is also very important, as we make a contribution both in partnership with the federal government and with the provinces in terms of regulations.

Another facet of our work may seem far removed from our mandate, but it is still important and it has to do with income distribution and what might happen with digitization and changes in the labour market. Our mandate is definitely not to deal with income distribution, since it falls under government policy and it is the responsibility of elected officials. However, it is very important that we understand the nature of these changes as they affect economic performance, financial security, and the transmission of monetary policy. We are conducting research projects that help us better understand these issues.

At the beginning of February, I gave a speech at the G7 about the effects of digitization; as you know, this is one of the G7’s priorities this year.

[English]

Senator Stewart Olsen: I understand this is a real balancing act for you, and I’m not sure if Canadians actually understand that. You have been signalling for some time now that interest rates are going to rise again. I’m a bit worried that Canadians right now, with the low interest rates, are increasing their personal debt at pretty high levels.

I know you can’t really tell me, but I guess I’m going to put out the caveat that perhaps it would be a good idea to be a little more firm with Canadians that interest rates are going to rise and maybe you can’t carry your personal debt the way you have been.

I’m quite worried about this aspect.

Mr. Poloz: You’re absolutely right, and it’s something we preoccupy ourselves with a lot. In fact, the interest rates that people pay on their mortgages can go up even while the Bank of Canada is holding firm because you have rising rates, in particular, in the United States. The dot plot is there for all to see. The bond market does its own thing, and our mortgage rates are more closely tied to that than they are to those short-term rates that the Bank of Canada has actual say over.

It’s true that people need to be prepared for higher interest rates. It’s why OSFI has put in place stress tests for new mortgage lending where everyone, whether it’s an insured mortgage or not, needs to qualify at a rate 2 percentage points higher than the one they will be actually paying. I have said in public that always seemed to me a good practice for any individual, whether it was a rule or not. Why would you want to try to evade that rule when the risk is that interest rates are going to rise?

As we said in our announcement just a week ago, we have increasing confidence that, first of all, to go back six months, we were worried that inflation was still below target and that our indicators weren’t there. Our model said it should be rising by now and it has done that, so that helped us become more confident that we’re there, the economy is close enough to its potential, and we’re in that space where it’s more a question of the timing and at what pace interest rates move towards more normal levels.

That pace, of course, will be determined by the data and how the economy is performing. What it is important for people to understand is that, of course, there are risks of moving too quickly. People have a lot of debt, so we’re carefully analyzing how sensitive the economy will be to higher interest rates. We have the capacity issues that I mentioned before and the NAFTA uncertainty; we have all those risks that Senator Wetston mentioned.

In that context, however, there are also other risks, which are that you wait too long. If you go too slowly in this, what happens is that inflation pressures have a greater opportunity to grow and, very importantly, that these financial stability risks, which are related to the stock of debt, continue to grow in the background.

So, of course, these are important observations, but getting back to the beginning, inflation is our thing, and these other things are primarily, if you like, side effects of that primary goal. We can’t control all of them. And that’s why macro prudential policies such as the new stress test have been so important to give us greater assurance that financial stability or financial vulnerabilities are at least being influenced in the right direction as we move forward.

I know that’s a lot. You’re right to describe it as a balancing act; that’s exactly what it is. These are all risks to our economy that ultimately, if there’s a realization of a risk in our economy, would mean we will either under- or over-perform on our inflation target. That’s the summary measure for us of how seriously you must take each one.

Along the way, at least at this stage of the cycle with the economy more or less where it belongs — there are still some pockets of capacity to use up, but we are still very close to what I call home — from the point of view of financial stability and inflation targeting, everything is in the same space. That is, interest rates are likely to rise and help both of those issues at the same time.

Also, the last thing we want to do is cause a financial stability risk to be more significant by moving too quickly, so it’s that pacing issue that we must weigh as we go along.

Senator Marwah: I would like your views on some potential emerging issues, and I will mention three. One is financial regulation. Recently, President Trump said he has pledged to do a big number on Dodd-Frank, and we know what happened prior to Dodd-Frank and what that got us.

The Financial Stability Board mentioned in its annual report its concern about the growing shadow banking system and its importance to transform that into some sort of market-based system. I think Deputy Governor Wilkins herself has talked about the importance of big data and IP, and I must admit that I share her views. It is important that we pay attention to that, and if we don’t it will be a risk to Canada over the long term.

Are there any of these issues or any others that you believe are important for Canada in the context of Canada’s future prosperity, or are these just things on the periphery that we should not worry about?

Mr. Poloz: No, those are very important issues. Carolyn sits on the FSB for Canada, so I will turn it over to her for the back end of your question on shadow banking and so on.

Let’s start with the financial regulation and the potential for some blowback on some of the progress that was made. We always knew that once we got a full international agreement, which is actually very recent — the Basel III package — we would then go into the phase for implementation and monitoring and reassessment. It’s a complex set of changes being put in place in all these countries around the world. Every financial system is a little bit different, but there’s a great deal of commonality because of the level playing field necessity.

We always knew that when we got to this stage, we would start watching how their reforms worked and would be monitoring how they’re performing. It would give us the opportunity to circle back and say, “We had an unintended consequence here,” or “We weren’t expecting this as an outcome” — the opportunity to tweak the whole package on the margin if, as a group or committee, we felt it to be necessary.

We are into that stage. I would say the proposals I see from the U.S. are fairly at the margin. They’re not wholesale changes. They leave the main thrust of the whole agreement intact. In some ways, it brings some elements even closer to what we have in the European banking system. In other words, the legislation that gets enacted is not exactly the same. It’s more or less principles being agreed to, and then the enactment can be different. It may have unintended consequences, and there’s some turning back.

Carolyn may wish to comment on that. I’m probably oversimplifying. I don’t think that’s a significant shock to the system. Of course, I don’t want it to go far. It’s been hard work to get this global agreement. Those principles remain intact; we don’t want any unravelling.

On shadow banking, Carolyn might comment. Perhaps correct anything I said about the U.S. tweaks, if you like.

Ms. Wilkins: Well we’ll see what they turn out to be. They’re in areas like the Volcker Rule and some of the application of the rules to smaller banks. Basel III was meant to be applied to international banks. What appears to be happening is looking at which parts we want to apply to our smaller banks that aren’t necessarily international. You’re going to have to wait to see what actually happens.

As a general rule, it’s true, it’s taken a lot of hard work to get where we got to. You can already see the benefits in terms of the resilience of the system. It would be a shame to undo it, and at the same time, it would be a shame not to look at different aspects of the rules we put in place and see if we can tweak it to actually undo some of the unintended consequences that are important. I would never presume to say we got it perfect when we did it. There’s a real assessment going on whether there are areas with leverage and liquidity rules where it might be useful.

On shadow banking, a lot of great work has been done to bring that market-based finance that wasn’t really in the regulatory perimeter and to add some guardrails in ways that are important and that I think have been helpful. There are the liquidity rules for some of these funds, for example, to make sure they have enough liquidity, among other things.

The unfinished business here is really trying to monitor and keep up with it, because market-based financing is a really good thing; it can complete markets and be more efficient. But at the same time, it’s often where risks build up and surprise us. There are a couple of areas where I think we need to pay some attention to some new financial products, such as volatility trades, as an example, but also cyberassets or crypto assets. In the first instance it’s just investor and consumer protection. It’s important to have trust in the system. But these can also have surprising financial stability implications if they get big enough and are widespread enough. We need to keep on top of that.

On the big data side, because you mentioned it, the Financial Stability Board did a report on fintech that I was involved in. On the big data side, from a financial system point of view, we need to understand the risks associated with use. Right now they seem to be small, but if you think of robo-advisors or big data uses to do credit scoring and some of these lending platforms, they tend to be a bit of a black box. They haven’t been tested over a cycle, so it’s important to keep an eye on it.

The final thing is cyber. That’s a part of unfinished business the G20 is really focused on it. Canada is really focused on it. It’s so important because we spend a lot of time on the financial risks, but the operational risks could be the place where some financial stability consequences happen in the future. It’s a tough nut to crack, but we’re focused on it.

[Translation]

Senator Dagenais: I am interested in what the Canadian dollar is doing and I check its value almost every day. Last week, the Canadian dollar was close to US$0.80, and it is now almost US$0.77. This is a concern for consumers and entrepreneurs doing business abroad.

In your view, would the Canadian economy be better off with a stronger or weaker Canadian dollar? It’s a very simple question, but it’s a big concern to Canadians.

Mr. Poloz: There is no magic value for the Canadian dollar in the economy. The value of the dollar is sensitive to many factors, such as interest rate expectations. The trend we are now seeing is that the U.S. dollar is regaining strength. This is a very recent trend and there are many potential reasons for it. One possibility is the volatility of financial markets. This is often the case because the U.S. dollar is a safe haven in such a situation.

For example, we are talking about the 10-year Treasury bond yield of 3 per cent for the first time in about four years. It’s symbolic, but we live in a different time. One speculation is that equities are very good right now because of very low interest rates; two things are happening at the same time and there is volatility in both markets simultaneously. But that is only one hypothesis.

As for the Canadian dollar itself, changes in interest rates in the United States and Canada are already expected. That would not have much effect on the Canadian dollar, because the expectation is already there. It is really the price of oil that affects the value of the Canadian dollar during major fluctuations and, for the time being, the price of oil is higher than it was a few weeks ago.

It’s a trend we can try to explain, but it’s not something we can forecast.

Senator Dagenais: Two weeks ago, I was listening to an economist who was forecasting the Canadian dollar at 60 cents; you cannot predict that, but if the dollar became weaker, would that force you to raise interest rates slightly to keep the value of the dollar? I imagine that has already been done before.

Mr. Poloz: We often see analyses that provide no explanation. It’s just a hypothesis. If I had to make forecasts for the price of oil, it would be risky. If I were able to forecast, I would do it with a margin of error, based on the Canadian dollar. It’s hard to do both together. We do not do it, because it’s almost impossible for the central bank, but we could try. I have spent a lot of time in my life doing this; it’s not just difficult, it’s almost impossible.

Senator Dagenais: It is impossible. Thank you very much, Mr. Poloz.

[English]

Senator Day: I recall having read an article recently from someone of international stature who was visiting Canada that said banks shouldn’t be investing in oil sands. My understanding, however, is the Canadian banks are probably more exposed to investment in the Canadian extraction industry than perhaps other banks. There are some banks, particularly in the United States, that have followed this green movement and have decided not to invest further in this particular activity. I think Canada is right at the top of the activity that they’re not investing in.

Is that the kind of risk that you monitor? Do you have any comments on, if this catches on, what kind of impact this might have on us?

Mr. Poloz: This is one of the longer-term financial stability risks that we spend some time on. I’ve seen comments like the ones you referred to. Without going to those specifics, to maybe sketch in the background of what that sort of analysis would be, in a world in which we have climate change risk and risk, therefore, of policies or outcomes that are related to that, an investment in that space could end up being valued less under a new set of policies than it is today. It could even end up being what we sometimes call a stranded asset, so you have an asset that is suddenly no longer valuable.

These conversations have been most frequently done in the context of the World Economic Forum. There’s the future of the global financial system strain at the World Economic Forum. However, these issues are bringing people together. There’s a movement to increase transparency around where those investments are, not just by banks but as companies. There is more transparency around where your risks of a green movement are or what risks a change to green-ended policies would have for your organizations. That would allow investors to see those risks and evaluate them themselves, as opposed to black or white, or we’re no longer investing in this, so they can appreciate what risks they’re facing. That movement toward more transparency is valuable. I think we will see more of that, namely, both companies and financial institutions reporting more on where their green regulation risk is. Then investors can decide. They make their own minds up about what risks they want to take on as investors.

The most important thing for us is that if it’s unknown, then it’s an unknown shock to the system when there is a change in those rules. Is this company more exposed than this company, or is this bank more or less exposed than another? If it’s not there in the annual reports, then you just don’t know, and investors can’t discriminate.

The Chair: Senator Bellemare has asked if she can ask a small question, and I think you can.

Senator Stewart Olsen: Very small.

Senator Bellemare: I don’t know if you can tell us, but you’ve been talking about normal interest rates. What are normal interest rates or normal real interest rates?

Mr. Poloz: This is one of our most important questions as policy-makers and probably our most difficult one. I’ll give you what insight I can give, and then perhaps Carolyn can possibly tie a bow on it by correcting it.

It’s not observable. I’ll start there. You can’t just look it up. We have various modelling approaches which give a range of possibilities that we think. What we mean by the neutral interest rate is that it’s the interest rate at which monetary policy is no longer either stimulating or contracting the economy. It’s what economists call an equilibrium. Everything settles in and that’s what holds it there. It’s an important concept because to the extent the interest rate is below that, you’re giving that much stimulus to the economy. If it were above, you would be constraining the economy. It’s an important benchmark.

We use various methodologies. We will publish more research on this soon. To give you a range of possibilities, between 2.5 and 3.5 per cent is what we consider to be that range of possibilities where it’s neutral.

Senator Bellemare: Normal or nominal?

Mr. Poloz: Nominal.

Senator Tkachuk: Your interest rate or the consumer’s?

Mr. Poloz: This would be our interest rate. That would be considered neutral. It’s somewhere in that range, assuming inflation is 2 per cent. If you subtract 2 per cent, then you can translate it into real so it’s 0.5 to 1.5 per cent in real terms.

We start there. Then that assumes all the forces that are under the surface in the economy have all been worked out; they’re back to normal. Of course, we know that that isn’t true right now. How do we know that? Well, it’s a pretty easy question to ask: What would happen if you move interest rates back to normal? Well, the economy would slow down a lot. We know that. I’ve used my analogy, which is like riding a bicycle up a hill. If you stop pedalling, the bike falls over and you have to start again.

We know that those forces need to work themselves through before we get all the way to neutral. That’s why we say we are confident that interest rates need to go higher. We just don’t know for sure how far, because of this, and how quickly, given those complications. Your question lies behind the earlier long answer that I gave, so I won’t go into that again.

That’s the gist of it. Another interesting benchmark along there is what is the real rate of interest. Today, with 2 per cent inflation, it’s minus 0.75 per cent. The real interest rate is below zero. That is another interesting benchmark because it kind of says what are the forces acting on the economy that cause that to be so low?

That’s just another way to look at the same question, real versus nominal.

I don’t know what else you will like to add.

Ms. Wilkins: There’s just one notion there that I think is important to remember when it comes to what this neutral rate of interest actually is. It’s the fact that it depends on savings and investment in Canada. However, because we work in global markets, it also depends on savings and investment globally. Of course, that’s going to be a function of potential output here as well as elsewhere and the incentives to save and invest.

Regarding the modelling techniques we use, we have four different models, if you can believe it, so when our paper comes out you’ll be happy to read it. I know you like models. Many of them estimate a global neutral interest rate and adjust it for Canada based on risk premium. It’s important to understand it’s not just forces in Canada that influence it, but forces that are global.

The Chair: Thank you very much for a tremendous session with wonderful questions from all our senators. Governor and deputy governor, thank you once again for being with us and being so forthcoming. We appreciate it and look forward to our next visit. Thank you very much for being with us.

(The committee adjourned.)