THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
EVIDENCE
OTTAWA, Wednesday, June 16, 2021
The Standing Senate Committee on Banking, Trade and Commerce met by videoconference this day at 6:30 p.m. [ET] to study matters relating to banking, trade and commerce generally, as described in rule 12-7(8).
Senator Howard Wetston (Chair) in the chair.
[English]
The Chair: Good evening, everyone. I would like to begin by welcoming members of the committee, our guests this evening and those watching this meeting online. My name is Howard Wetston, and I am chair of this committee.
Before we begin, I would like to remind senators and witnesses to keep their microphones muted at all times. Before speaking, please wait until you are recognized. I’ll ask the senators to use the raise hand feature to let me know that they have a question or comment.
I would now like to ask the members of the committee to introduce themselves, starting with the deputy chairs.
Senator Wallin: Pamela Wallin, senator for Saskatchewan and deputy chair of this committee.
Senator Smith: Larry Smith, and I’m deputy chair working with Senator Wetston, Senator Wallin and the rest of our group. I’m from Quebec.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator C. Deacon: Colin Deacon from Nova Scotia.
[Translation]
Senator Ringuette: Pierrette Ringuette from New Brunswick.
Senator Dagenais: Jean-Guy Dagenais from Quebec.
Senator Loffreda: Tony Loffreda from Quebec.
Senator Moncion: Lucie Moncion from Ontario.
[English]
Senator Anderson: Margaret Dawn Anderson, Northwest Territories, replacing Senator Klyne for the evening.
[Translation]
Senator Bellemare: Senator Diane Bellemare from Quebec.
[English]
The Chair: I think that’s everybody. I realize it is a challenge to do this, but we’re going to get it completely correct at some point. I know we will.
Today we have the pleasure of having with us the Governor of the Bank of Canada, Mr. Tiff Macklem. As you know, Mr. Macklem, the committee has been looking forward to your appearance, and we thank you for your patience these last few months as we tried to make this happen earlier. We have finally succeeded, and I’m absolutely delighted that you’re with us. I know that the committee is as well. Thank you for joining us this evening.
Tiff Macklem, Governor, Bank of Canada: I am very pleased to appear before you this evening. This is my first opportunity to address you as a committee since being appointed Governor of the Bank of Canada. Let me begin by underlining that these appearances are an important part of our accountability to Canadians. I am very much looking forward to your questions and your perspectives.
I’m going to begin by reviewing for the committee the actions that the Bank of Canada has taken since the start of the pandemic, and then I’m also going to provide an assessment of the progress towards economic recovery.
[Translation]
At the beginning of the pandemic, our objective was to restore financial market functioning and keep credit flowing.
Since the end of the first lockdown, market functioning has improved and our focus has shifted to providing monetary policy stimulus to support the recovery, get Canadians back to work, and bring inflation back to our 2% target.
[English]
Fifteen months ago, the extreme uncertainty caused by the virus and associated lockdowns triggered an unprecedented dash for cash in financial markets. With many more sellers of financial assets than buyers, credit markets froze, threatening access to credit for businesses and households. The Bank of Canada acted quickly and in scale, providing liquidity and purchasing assets to support the functioning of key financial markets. As a result, the bank’s balance sheet expanded rapidly as we purchased federal, provincial and corporate bonds, commercial paper, bankers’ acceptances and mortgage bonds.
These new programs — 11 in all — were successful in restoring functioning across financial markets. Today, all but one of our exceptional programs have been wound down or ceased operations. The one remaining program is our purchase of Government of Canada bonds, which is also known as quantitative easing, or QE for short. I’ll come back to that in a moment.
To provide monetary policy stimulus, the bank lowered our policy interest rate as far as we could, effectively, to one quarter of 1% in the spring of 2020. Last summer we added exceptional forward guidance, committing to hold our policy rate at its effective lower bound until slack is absorbed, so that we sustainably achieve our 2% inflation target. This commitment was supplemented and reinforced by our QE program, which is helping to lower interest rates across the yield curve, making it less expensive for households and businesses to borrow.
[Translation]
Economic developments have broadly been in line with the outlook in the April 2021 Monetary Policy Report.
I would like to highlight three key messages.
First, the economic recovery is making good progress. Canadian households and businesses have shown impressive resilience to the pandemic, and with more Canadians getting vaccinated, we anticipate better times ahead. Second, a complete recovery will still take some time. The third wave of the virus has been a setback. It has strained health care systems in some regions and has again hit sectors where physical distancing is difficult. Important parts of the economy remain very weak, and too many Canadians are still out of work.
[English]
Third, the bank remains steadfast in its commitment to support Canadians and Canadian businesses through the full length of the recovery. For working Canadians, a complete recovery means a healthy job market with good opportunities. That includes low-wage workers, women and young people, who have been hit hardest by this pandemic. A complete recovery means companies have confidence that the pandemic is over and they are investing to seize new business opportunities. For both households and businesses, a complete recovery means they can count on inflation being sustainably at our 2% target.
Let me elaborate on these themes. Following a sharp bounce back in economic activity in the fall and winter, we have seen choppiness in growth again in the second quarter. Renewed lockdowns associated with the third wave of the pandemic have dampened economic activity early in the quarter, and this has been largely as we anticipated in April.
The ebb and flow of the virus is mirrored by the ebb and flow of economic growth. Recent jobs data shows that workers in contact-sensitive sectors remain most affected, and the employment rate remains well below its pre-pandemic level. Still, we have seen impressive resilience and adaptability from Canadian businesses and Canadian households. They found new ways to shop, serve customers and work remotely.
Housing demand has been particularly strong, driven largely by the desire for more living space and low mortgage rates. All the while, limited supply has led to sharp increases in prices. As we explained in our May Financial System Review, it’s important to understand that the recent rapid increases in home prices are not normal. Our analysis suggests that in some markets, price expectations have become extrapolative, meaning people may be rushing to buy partly because they expect prices to keep rising. This behaviour can exaggerate near-term house price increases relative to fundamental demand. There are risks that some households may overstretch themselves financially.
In this regard, we welcome the revisions to the B-20 guideline issued by the Office of the Superintendent of Financial Institutions, which raised the minimum qualifying rate — put a floor in. There were also parallel changes in the insured market, which will also be helpful. These changes will help protect Canadians from overstretching.
The federal budget also included some measures that will add supply. Overall, we expect the housing market to be better balanced, but I will say we will be continuing to watch this very closely.
[Translation]
Looking more broadly at the economy as a whole, we forecast strong consumption-led growth in the second half of this year, as vaccinations progress further and restrictions ease.
Fiscal stimulus from the federal and provincial governments will also make an important contribution to growth.
Strong foreign demand and higher commodity prices are expected to drive exports and business investment, leading to a more broad-based recovery.
In April, we projected that the economy would grow by around 6.5% this year, about 3.75% in 2022 and about 3.25% in 2023.
[English]
With this improved outlook, we are hopeful that the pandemic will end up causing less labour market scarring and less lost capacity than we earlier feared. We have therefore revised up our estimate of the economy’s potential output. I do want to emphasize that there is considerable uncertainty around this estimate. As the recovery continues, we will be paying attention to a broad spectrum of indicators of slack in the economy, and this includes a broad range of labour market measures and indicators.
Our monetary policy remains grounded in our inflation-targeting framework. The most recent data showed that inflation remained above 3% in May; CPI was just released this morning for May. In our last policy meeting last week, we indicated that we expect inflation will remain near the top of our 1% to 3% inflation control range through the summer. This largely reflects what we call “base-year effects,” which really reflect the fact that inflation, particularly certain prices like gasoline prices, was very low a year ago, and that’s combined with the fact that we have seen considerably higher prices for oil and therefore gasoline.
These base effects will fade going forward, and the governing council expects that as that happens, the ongoing excess supply in the economy will pull inflation back down.
In our most recent policy announcement last week, the governing council judged the economy still needs extraordinary monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until slack is absorbed, so that the 2% inflation target is sustainably achieved.
Based on our latest projection, that is expected to happen sometime in the second half of 2022, although I will underline that this timing is unusually uncertain given the difficulties in assessing the economy’s supply capacity.
Our forward guidance on the policy rate continues to be reinforced and supplemented by the bank’s quantitative easing program. In April, we adjusted our weekly purchase of Government of Canada bonds to a target of 3 billion per week, and that’s down from a previous minimum of 4 billion. This adjustment reflects the progress that we have already seen towards economic recovery.
With the end of most of our extraordinary programs, the bank’s balance sheet has shrunk to about $475 billion, and that’s down from a peak of about $575 billion back in March. In the chart that I provided you, it shows you the evolution of our balance sheet, the various programs and the composition and size of our balance sheet.
The bank currently holds more than $350 billion of Government of Canada bonds, and that represents about 45% of the outstanding stock of nominal Government of Canada bonds.
Looking ahead, further adjustments to the pace of net purchases will be guided by our ongoing assessment of the strength and durability of the economic recovery. If the recovery evolves broadly in line or stronger than our latest projection, the economy won’t need as much QE stimulus over time. Further adjustments to our QE program will be gradual, and we will be deliberate in both our assessment of incoming data and the communication of our analysis.
We remain committed to providing the appropriate degree of monetary policy stimulus to support the recovery and achieve our inflation objectives.
With that, senators, let me stop and I look forward to your questions.
The Chair: Thank you very much, governor. We would like to begin with questions and appreciate your information you have provided us.
Senator Wallin: Governor, welcome and thank you for being with us, for this long-delayed encounter that we’re having.
I know you spent a large part of your career at the bank and have come back as governor in the middle of a pandemic and all sorts of other issues. I’m looking for a little more on your philosophy as a governor of a bank. You seem much more in tune and much more vocal about social policy objectives. You talk about accelerating climate-smart capital flows; this is in the interest of the economy. You have talked about particular problems in the economy for women, youth and low-wage workers.
It seems like there is almost a merging of the commentary we hear from you and the commentary we hear on the fiscal side as well. Can you just describe whether or not you think it’s time for the governor to play a more active role on those issues?
Mr. Macklem: It’s such a broad question that it’s hard to know where to start. But let me say two things. First of all, I do think that it is very important that Canada’s central bank, whose purpose is to serve Canadians, is engaged with Canadians, and that we listen to Canadians, understand the concerns of Canadians, and within our mandate, speak to those concerns.
Traditionally, central banks have done a very good job of talking to markets, experts and the media. I am trying more deliberately both to talk more directly to Canadians and to listen to Canadians. I can expand if you like on some of the ways we’re doing that.
The second thing I would say is that this pandemic has had enormously uneven effects on society. It has widened and is highlighting some of the divides in society. These are so pronounced.
Monetary policy is a macro instrument, but these inequalities and this unevenness are so pronounced that you really cannot understand the overall economy without looking at what is going on sector by sector, in different cohorts and groups of workers, in rural areas versus urban areas and in different communities across the country.
We have been looking at a more granular level. We have been looking at a broader set of indicators, and we have been talking about that with Canadians.
Senator Wallin: Are you worried about what most people are describing as the levels of generational debt? When we talk about quantitative easing and the $358 billion in government bonds, we’re now dealing with numbers that are unheard of in the Canadian context. Canadians are also seeing it in their own particular lives. This debt is beyond significant. Can we really talk about a fiscal anchor set at a 50% debt-to-GDP ratio? Is this kind of debt and that response to it sustainable?
Mr. Macklem: Senator Wallin, there are lots of things to worry about. You have to consider, “What were the alternatives?” The Government of Canada’s response by providing an overwhelming fiscal response and the Bank of Canada’s response of using extraordinary monetary policy tools to keep credit flowing, keep financial markets functioning and provide much-needed monetary policy stimulus have been essential in, first, putting a floor on this crisis and then supporting recovery. Frankly, it’s working.
A year ago, we were in an incredibly deep hole. There were roughly 3 million Canadians unemployed. More were working much less than they wanted to, less than half their normal hours. We have come a long way back. Of course, we still have a considerable way to go. As I highlighted, there are large parts of the economy that remain very weak. We will still need that stimulus for some time.
Senator Wallin: We’ll come back to discuss that on the next round. Thank you so much, governor.
Senator Smith: Thank you, governor, for being with us today. I appreciate your participation. We have been actively lobbying to make sure that we would have the chance to chat with you.
My question is tied to what you have been discussing in terms of quantitative easing. The bank announced it’s going to start to cut back, and you’re looking at the bank’s inflation target goals. We have been told since the start of the pandemic that inflation is within a target range, and you have control of the situation. However, the massive injection of cash into our economy has seen asset prices skyrocket, and house prices, particularly, continue to rise. In our little town of Hudson, house prices have gone from about $300,000 up to $560,000, and we have a population of 5,000.
One of the issues, though, is the availability and pricing of raw materials. When we look at increases in house prices, we could argue that obviously it’s inflationary, but how do you measure house price increases, in today’s context, with some of the other variables that you’re monitoring, to decide what you’re going to do with inflation and potential rate increases? We heard, of course, that in the United States, their inflation targets have been surpassed, over 3%.
I’m going around in a bit of a circle, but I would like to have your opinion on house prices and the affordability and unavailability of raw materials, trying to get access to raw materials, because I just moved. I downsized, as a senior, and we moved into a complex. It was completed eight months late. Then, when we were trying to get things done, to add, there was no product available.
I wondered how you fit that availability of raw materials into the whole process of building more houses. How are you going to build more houses if you don’t have the materials to construct them? That seems to be a real issue.
Mr. Macklem: Senator Smith, it actually links back a bit to the previous discussion with Senator Wallin. Everything about this crisis is so unique, and this crisis has affected both demand and supply. It has shut down or severely limited production in some areas. The demand for some things, like houses, has gone up a lot. We’re all spending a lot of time at home. More than 5 million Canadians are working at home. Young people are studying at home. Recreation is at home. Canadians want more space, and so we have seen a real increase in demand for housing.
At the same time, fewer people are moving. Many people don’t want to put their house on the market. In the context of the pandemic, they are not too keen on having people come through their house. These are incredibly unique circumstances, and this is not just a Canadian phenomenon. It’s a global phenomenon. Housing demand across North America has been extremely strong. That, combined with some production restrictions early on in the crisis that limited supply of lumber, has caused a big increase in the price of lumber.
One thing I would underline, though, is that we are going to see these bottlenecks. There are supply-chain problems in a number of places, and lumber is a good example. The price of lumber surged unbelievably. It has come down quite a bit. Lumber futures are down 40% from the peak. They are still elevated, but they have come off. I think that reflects this more general trend we have seen in the economy. There is a lot of ingenuity and adaptability. Very unusual things are happening, but businesses, households and workers are adapting, and we’re working through these things.
Coming back to housing, this is a big issue. We have done a lot of analysis on this, which we published a few weeks ago in our Financial System Review. As I said, there are these unique circumstances that created a big surge in demand at a time when supply is limited.
What worries us about that is, as I mentioned, we’re starting to see some signs of extrapolative expectation. What does that mean? It’s a fancy word. It means that people start to believe the kinds of price increases we have seen recently are going to continue. They think, “I have just got to stretch now and buy now, because it’s just going to get worse.” Our message is that the kinds of price increases we have seen recently are not normal. They will not continue indefinitely, they are not sustainable, and people should be cautious about rushing out and overstretching themselves.
There is some evidence that is happening. If you look at mortgages and mortgage growth, there has been a particularly strong growth in what we call high-loan-to-value or high-loan-to-income mortgages. In other words, people have a large mortgage relative to their income. The proportion of people who are getting mortgages that are more than 4.5 times their income is over 20%.
That does suggest some Canadians are stretching, and that is a worry. The measures announced by the Office of the Superintendent of Financial Institutions, or OSFI, and the Government of Canada to adjust the B-20 guidelines to put a minimum of a 5.25 qualifying rate will be helpful. That makes sense, because, as you know, interest rates are unusually low, which means eventually there will be more room for them to go up. Creating a higher minimum qualifying rate protects Canadians from overstretching.
You are starting to see some early signs of slowing in the housing market. We are expecting supply to improve and demand to slow down, so we are expecting the housing market to come into better balance. However, we do think it will take some time, and it is something we are watching closely.
Senator Smith: For young people who have overextended themselves, once their five-year term at 1.83 or 1.78% expires, with the heavy indebtedness they have and the challenge of getting the number of houses built to satisfy potential demand, how do you see that going? Will this be a bad end for a lot of younger folks or a demographic that may not have the cash available to be able to have a smaller mortgage as opposed to a huge mortgage and on a $400,000 or $500,000 property?
Mr. Macklem: It’s hard to comment on every individual Canadian. From a system point of view, we have strong underwriting standards in this country. There is the risk that some households could overstretch. As I said, that is something that concerns us, and I think the new measures will be helpful in protecting Canadians.
Getting back to my answer to Senator Wallin, I would end by underlining that I am very conscious that there are mostly newer households, younger families, that are having trouble breaking into the housing market. That is another source of concern.
Ultimately, the solution has to be supply. This is far from the domain of monetary policy, so I should probably close it down pretty quickly. There are a lot of supply issues at the provincial and municipal levels. I think it’s important that there be a greater effort to figure out how we get the supply of housing that the country wants.
[Translation]
Senator Bellemare: Welcome, governor. It’s a pleasure to see you.
My first question ties in with your opening statement, Senator Wallin’s questions and the importance of listening to people. It also relates to the future agreement you’ll be signing with the Government of Canada. I believe the last letter to renew the five-year agreement for conducting monetary policy was sent in September 2016.
As you know, many economists would like to see the Bank of Canada renew its agreement with a new mandate. The bank’s framework hasn’t changed since 1991, so many economists want the Bank of Canada and the government to agree on a dual mandate: promoting stable prices and employment. That’s the case in the United States, Australia and New Zealand, countries that have informed Canada’s framework in the past.
According to a discussion paper you released in August of last year, a dual mandate approach to monetary policy, as opposed to the current policy, would be just as effective.
I’m not sure whether you can tell us about what you will be recommending to the government, but are you going to recommend that Canada adopt a dual mandate? Many believe you should because it would be in the best interests of Canadians.
Mr. Macklem: Thank you, senator, for your commitment to the issue. As you know, we’ve had a few discussions. You took part, providing a written submission. Your contribution has enhanced the debate, so thank you for sharing your perspective.
With respect to a dual mandate, one that targets inflation and employment, I can say two things.
First — and this ties in with Senator Wallin’s questions — something we did was reach out to Canadians. Leading up to the renewal of the inflation-control target, we consulted the markets and experts, but this time around, we also reached out to Canadians through an online survey called “Let’s Talk Inflation.” Interestingly, the response from Quebec was very strong, with Quebecers participating in large numbers.
We also held focus groups with Canadians, and what we learned was that, even though inflation has been low for quite some time, Canadians do not like inflation. They do not like it when prices go up; they watch their personal finances closely, so they have a hard time when prices rise rapidly.
Second, we asked Canadians to compare the flexible inflation targeting approach we have now with a dual mandate approach and a system similar to what they have in the United States, in other words, with average inflation targeting allowing for some degree of price-level targeting to be introduced. Overall, what we heard was that Canadians prefer the flexible system we have, but are interested in those alternative frameworks. They don’t really care for the other options, including nominal GDP targeting.
As far as the dual mandate is concerned, we found out that Canadians want employment to be a key element of the framework. Some Canadians support a dual mandate, but the range of views was diverse. Some Canadians were in favour of a dual mandate because they wanted employment to play a more important role in Canada’s monetary framework, but other Canadians felt that full employment was not something the central bank could really control. A number of factors influence full employment. Employment should be an important part of the framework, but the idea of having a dual mandate may be too difficult for the central bank to achieve.
We learned a lot from that exercise, and it will help inform our proposals going forward. The dual mandate option met with a diversity of views, but a consensus emerged over the fact that employment should be an important part of the framework. That is something we are committed to.
The other thing we learned from our consultation was that the views of experts and Canadians were aligned. That isn’t always the case. Experts felt that, during our simulations, our flexible inflation targeting framework was good. As for the dual mandate, performance through Monte Carlo simulations was also adequate. The better choice depends on the situation, but there aren’t any major differences. In the end, it was compelling to see that experts and Canadians were in agreement.
Senator Bellemare: Thank you, governor.
[English]
Senator C. Deacon: Thank you very much, chair, for convincing the governor to handle so many cancellations due to our schedule and still come with such a great smile and great answers. Thank you, governor, very much. It’s wonderful to see you.
I want to focus mainly on business investment if I could. Business investment — particularly in intangibles and digital assets, across sectors and across the scale of companies from formation capital through to later-stage growth capital. That is central to our future prosperity and to creating the productivity growth that we need to finance a stable and more prosperous economy. It worries me that we’re not necessarily keeping up with — despite great news lately with a lot of almost daily announcements of new unicorns in this country — the world. From my standpoint, when I am looking at venture capital investment around the world, we are not keeping up with those levels of investment, which are allowing different countries to really create more disruptors and be less at risk of being disrupted. Could you speak a bit about business investment and particularly intangible investments — digital investments — across sectors?
Mr. Macklem: Thank you for the question.
Well, the first thing to say is this is a long-standing issue in Canada. Our business investment, our diffusion and adoption of new technologies, has lagged. I think the tragedy, in a way, is that in many areas, Canadian research and innovation is absolutely cutting edge — world class. However, too often what is happening is a Canadian invention gets commercialized in Silicon Valley and many of the benefits flow south of the border.
Before being governor, I was dean of the Rotman School at the University of Toronto. Across the street from me was Geoffrey Hinton and his team, who were the founders of deep learning. This is a great example of a place where Canada is one of the world leaders — Geoffrey Hinton, along with Bengio in Montreal; Alberta has some strength in AI as well. To mention another area that is not as far along as AI, but is a new-coming technology is quantum computing. Again, Canada is a leader both on the theoretical side and on the commercialization. Canada has one of the very few commercial quantum computers in the world, produced here in Canada — in B.C.
We need to do a better job of turning this world-class research into business investment and creating new products and services. I will say, I do think the Canadian ecosystem is much better today than it was 10 years ago. With venture finance, today compared to 10 years ago, there is no comparison. Are there still some gaps? Yes. There is a gap particularly in that kind of mid-tier finance, particularly for more patient capital — sometimes called the valley of death — where we do need to build out more capacity. However, it has gotten a lot better.
That was a long preamble. What is happening in this crisis, or what are we seeing? Obviously, when your sales are way down, you’re struggling to survive and not thinking about investing for the future. Quite naturally, since we’ve gone through a very deep recession, investment has been weak. Interestingly, however, even against that background, we are seeing many companies invest in digital investments. It has been driven by two priorities. One is work from home — making sure that companies have the digital infrastructure so that their workers can work effectively from home — and, of course, the other is figuring out how to serve customers in a digital world.
We have seen a fair amount of digital investment through the crisis. We are expecting to see — and I think we’re fairly confident we are going to see — a strong consumer-led recovery as we come out of this third wave, restrictions are eased and the economy opens up. A key for successful self-sustaining recovery is going to be that this broadens beyond consumption to investment. We are also expecting to see some strength in exports. That is often quite linked to investment, so that is another positive. I think the more that businesses can really embrace these new technologies and take risk and invest in them, I couldn’t agree more. That is the key to growing our economy and creating a bigger economy with more space to grow.
Senator C. Deacon: Thank you, governor. I’ll look forward to reaching a little further on this issue in second round. Thank you.
Senator Loffreda: Thank you, governor, for being here with us this evening. I’d like to continue discussing housing affordability in Canada. It is a major concern. You did briefly discuss supply, interest rates and more stringent mortgage rules. In your opinion, is the additional supply brought in through the federal budget going to be sufficient to stabilize the housing market? Are our mortgage rules stringent enough? Should they be adjusted accordingly? Also, interest rates are very important, especially given the fact that I was reading that the Canadian household debt in 2020 is the highest amongst the G7 countries and close to 177%. Would you contemplate increasing interest rates? It’s so important, because I was also reading this morning that the Canadian Real Estate Association recently revised its home price forecast and is now predicting the average selling price will increase 19% in 2021.
Mr. Macklem: Thank you, senator. You packed a few questions in there, so I’ll try to separate them out.
First, I’ll address the measures to encourage supply, and bring demand and supply in line. Will it be enough? I wish I had a crystal ball. What I can say is that in our own forecast, we do have housing activity remaining strong for some time, but we do have it coming into better balance. In the federal budget, there are a couple of measures that will particularly affect supply. There is a vacancy tax on houses owned by foreigners. That, of course, will encourage foreigners who own houses to rent them out so they don’t have to pay the tax. That will increase the supply of rental housing, which is helpful. There are also some measures to expand the supply of social housing, which is critically important in that segment of the housing market.
Then with respect to demand, there are the measures that I have already mentioned, adjusting the B-20 guidelines.
What I would emphasize is that, as I said before, this housing boom is created by a very unique set of circumstances. We’ve all been at home for more than a year.
There has been a big increase in demand. Supply has been constrained. Some measures have been put in place. It is going to be important that all levels of government continue to look at what they can do on the supply side. I do think we need to give this some time to see how it rolls forward.
As we get back to more normal activities, we need to see how that housing market evolves. You could imagine scenarios where people are so happy that they can get out and do other things, they are less focused on buying a bigger house and more interested in travelling or doing other things. We really don’t know. We have not been through anything like this before.
On the other hand, you can see scenarios where there is continued strength in housing. Immigration, which is an important source of household formation and demand, has been very low during the pandemic for obvious reasons. As economies globally open up, immigration levels will come back up and particularly in some of our larger cities. That could create a new push to demand for housing.
So my advice here would be a number of things have been done. We need to be thinking about and developing some contingency plans and things we could possibly do if there is more to be done, but some things have been done. We are starting to see some moderation in housing and I would give it a little time before doing anything else.
Senator Loffreda: Thank you. I’ll come back in the second round on the debt level if possible.
Senator Marshall: Thank you, governor, for being here. I wanted to talk about your balance sheet because I have been tracking it. You present it on your website weekly. I was looking at the Government of Canada bonds and it’s at $383 billion now. You did say in your opening remarks you were looking at $3 billion a week now, I would think for the next 52 weeks. That’s an additional $150 billion. The government in its budget indicated they were going to borrow around that much this year.
You are saying that the bank is holding 45% now — I don’t know if you meant the total Government of Canada debt or just the recent purchases. I was interested in knowing what the long-term plan is. You can’t continue to buy the Government of Canada bonds to the degree that you are buying them now into the next number of years I wouldn’t think.
What are the long-term plans with regard to your purchases of Government of Canada bonds and when are you going to start cleaning off the balance sheet?
Mr. Macklem: Let me begin by clarifying one important point. We haven’t committed to buying Government of Canada bonds at a rate of $3 billion a week for the next 52 weeks.
Senator Marshall: Okay. That’s good to know.
Mr. Macklem: At our last policy decision, we agreed as a governing council that the Canadian economy right now continues to need the exceptional support that we’re providing. We kept our policy rate at its effective lower bound, we reaffirmed our forward guidance and we indicated that we would continue to buy Government of Canada bonds at a rate of $3 billion a week.
We’ve also committed that, at each decision, we will reassess how much monetary policy stimulus is needed to support the recovery and get inflation back to target. What we’ve indicated is that the further adjustments of our QE program will depend on our assessment of the strength and durability of the recovery. As I said in my opening statement, if the recovery continues to evolve broadly in line or stronger than the projection that we’ve laid out, we will not need as much QE over time. So you can expect to see some reductions. We’ve also committed that those will be gradual and they will be very deliberate in our communications and our assessments.
Just to be clear, the $3 billion is what we think it needs right now, and going forward we will be adjusting in line with how much we think is needed going forward.
The second thing I’d under underline is we’ve already made some adjustments. We started at the beginning when we were really in the deepest and worse phase of the crisis the pace of buying was $5 billion a week. We reduced it to $4 billion and termed it out so we were buying less but we were shifting the composition, so the overall amount of monetary stimulus was similar. In April we reduced it from a minimum of $4 billion a week to a target of $3 billion a week. Those adjustments really reflect the progress that has been achieved so far. We’ve still got a long way to go but we are in better shape than we were a year ago. We don’t need as much quantitative easing. Our assessment is that this program is still very important and we still need it for now.
Senator Marshall: When you do your assessment and you were at $5 billion and reduced to $4 billion and now down to $3 billion, what factors do you consider when making your assessment? Is it just a qualitative assessment or is there some sort of quantitative assessment?
Mr. Macklem: The fundamental guide to our monetary policy is the inflation target. A year ago inflation was negative, it was negative 0.4 in May 2020. We were in a very deep hole. There was a risk of deflation. There was a need for massive amounts of monetary stimulus and that’s what was delivered. Today we have come a long way back, but as I highlighted earlier, large parts of the economy remain very weak. There are still far too many Canadians unemployed. That is putting sustained downward pressure on inflation. To sustainably achieve our inflation target, we have to further advance this recovery and that’s why we are continuing, although at a lower level.
In terms of how we assess that, we use a whole range of tools. We have various economic models we use to do projections. We have surveys of businesses and of Canadians. We look at a whole range of labour market statistics, investment and exports to assess both the demand and supply dynamics in the economy. I can’t say there are one or two things we look at. We really have to look at the totality and come to a judgment.
Senator Marshall: A broad range, yes. Thank you.
The Chair: The governor has been very kind to us and said, I’ll stay until we turn out the lights. My words, not his words, of course. He’s prepared to stay with this. We will have an opportunity for a second round and an opportunity to ask the governor further questions. I would ask colleagues to be mindful of the fact that obviously we don’t want to take advantage of his graciousness this evening. When we get to a second round, let’s try and tighten up some of the questions as we move forward. Thank you so much, everyone.
[Translation]
Senator Moncion: Good evening, governor. My question has to do with Canada’s response to the pandemic, specifically, the similarities between its response and that of European countries and the differences between the policies and measures adopted. Can you describe the differences and similarities in the range of measures that were taken?
Mr. Macklem: One of the striking things about the pandemic is that it affected everyone in the world at almost the same time. It was the most global, the most international, shock we have ever experienced. On top of that, it struck very quickly. Recessions tend to start with a gradual slowdown. This time, the economy dropped in two months.
The monetary policy response was both budgetary and fiscal. That is due to the fact that the situation was similar in a number of countries, especially in developed countries.
I think the differences reflect pre-pandemic conditions. Prior to the pandemic, Canada’s economy was healthy. Employment was strong, inflation was very close to target, and the fiscal situation was fairly good. Monetary policy, interest — our key interest rate was 1.75%.
In Europe, the situation was less positive. Interest rates were still quite low, with less space for monetary policy. The fiscal situation was not as good, and there was less fiscal space.
Canada and Europe took very similar measures. Canada’s measures were a bit stronger in intensity. We had more fiscal space. The Bank of Canada’s balance sheet was way down. We had more of an opportunity to expand our balance sheet. Thus, Canada’s response was somewhat more robust.
We learned a lot, especially the central banking community, and we talk often. We all put similar measures in place, but the approach differed from country to country. We communicate and we learn from one another. It’s very helpful, particularly when we do things we’ve never done before.
Senator Moncion: Canada is still the G7 nation with the lowest debt-to-GDP ratio, even after the pandemic. I know other countries are outperforming us, but they aren’t G7 countries.
Thank you.
Senator Dagenais: Thank you, governor. I have two pieces of good news for you. The loonie is up as compared with the greenback. I believe it’s still at 81.4¢. Could the strong dollar negatively impact the recovery?
Mr. Macklem: I’ll start by saying that we don’t target the Canadian dollar. Our targets revolve around inflation. We have a flexible exchange rate, which is an important part of our framework. For the most part, exchange rate movements are useful for stabilizing the economy — not always, but generally that is what happens.
What I can tell you is that our April projections were based on an 80-cent Canadian dollar. As you mentioned, the dollar is at about 81¢ or 82¢. A few days ago, it was at 83¢. That’s above our projections.
The message is this. Our projections take into account an 80-cent exchange rate. That informed our monetary policy decisions, as our projections show. It’s a bit higher than what we had forecast.
The increase is mainly due to the fact that the prices of oil and other commodities are still up. Canada is a major exporter of oil, wood and minerals. That’s good for Canada because, when we export our goods, it brings in more revenue from the rest of the world.
We are seeing that with the strong dollar, but we do know it can reduce the manufacturing sector’s competitiveness, and that could weigh on the outlook.
We pointed out that the strong dollar is a risk, especially if it goes even higher. It would bring down exports, and we would take that into account in our outlook and monetary policy decisions.
Senator Dagenais: You brought up exports and their effect on the recovery. Oddly enough, 2019 and 2020 were excellent years for China. I’m told that exports exceeded 30%, but correct me if I’m wrong. I’m also told they may drop in 2021 because China may scale back on infrastructure projects.
How do you see the recovery in relation to exports to the United States and China? I heard that exports with China are up right now.
Mr. Macklem: Canada’s most important market is really the United States. More than 70% of our exports go to the United States, and the U.S. economy is experiencing a strong rebound.
The other thing I want to say about exports is that we have already seen a fairly significant rebound in goods exports, which is mostly due to the U.S. recovery. Services exports are still down, however.
When we think of exports, we always think of goods, but the reality is that, over the past 15 years, services exports have risen significantly and account for a growing share of our export economy.
The hope is that the reopening of the Canadian and U.S. economies will drive a rebound in services exports. All of that is tied to another factor, intangible investments. We are strong in a number of services sectors, so we could potentially see a strong rebound in those sectors.
If the Canadian dollar goes up, that potential could drop, so it’s something we will be keeping a close eye on.
Senator Dagenais: Thank you, governor. That was very informative.
[English]
Senator Anderson: On May 13, 2021, you spoke about the benefits of an inclusive economy. You noted that diversity and inclusion are critical to success as a central bank in the service of Canadians.
You also stated that an analysis last year of 217 Canadian businesses showed that 5.5% of their directors were members of a racialized group; and of 270 companies with more than 2,000 members, seven positions were held by Indigenous peoples and six persons with disabilities. You added, “We can and must do better.”
Can you please tell me what the Bank of Canada is doing to increase and encourage diversity and inclusion? What does that look like in terms of measurable goals, targets and time frames? Qujannamik.
Mr. Macklem: Are you interested in what we’re doing within the Bank of Canada or in our policy role?
Senator Anderson: I would say both.
Mr. Macklem: Within the Bank of Canada, diversity and inclusion is not a new topic. As Senator Wallin mentioned at the beginning, I’ve been at the Bank of Canada a long time. I was gone for six years, but I’ve been involved in many initiatives. Certainly, improving our diversity and inclusion is important to us, and there are a few reasons for that. I will highlight two.
Over time, we have all gained greater appreciation that diversity of skills, lived experience, language and ethnic background leads to better decisions. It avoids groupthink and brings new perspectives. If you can create a culture where people can bring their whole selves to work and feel they have a licence to bring their best ideas forward, you get better decisions. That is critically important in how we deliver for Canadians.
The other aspect is that we need to be reflective of the diversity of Canadians. Canadians need to see themselves in the Bank of Canada. We have some work to do at the senior-most levels, in particular.
I left the Bank of Canada for six years and I came back. I have been pleased to see that some of the investments we made, those people are moving up the ranks. When I look at the level below top leadership, there is a more diverse and deeper pool of talent.
What are we doing? It’s on our website. We announced a new diversity and inclusion plan. We have set clear goals and targets for designated groups. We have set clear targets for not only numbers but also more senior representation.
I’ll be honest; we have made progress, but we need to accelerate progress. It’s not going to change overnight, but I can tell you that we are determined.
With respect to more broadly, obviously, monetary policy is a broad, macro tool. It isn’t well equipped to target specific groups. I would underline two things.
Going back to the very beginning, this crisis has widened the divides in society. To give you a few numbers, if you look at employment since the start of the pandemic, women are 4.2% below their pre-pandemic level of employment and men are 1.9% below. Women have more than double the loss. Youth are 11% below pre-pandemic levels. The most affected are young women, at 14.5% below pre-pandemic levels.
If you look at this by income level — the chart we put in the Monetary Policy Report a few times, which I find stunning — low-wage jobs are roughly 20% below their pre-pandemic level. All other jobs are actually above their pre-pandemic level. This highlights how the crisis has most affected those least able to afford it. Fortunately, their incomes have been largely replaced by government programs, but those aren’t going to last forever.
A critical aspect of this recovery is that — in the context, as people come back to work — we have to work hard to narrow those gaps. I think that’s the responsibility of companies and governments, and we need the educational sector to help us.
The other thing I would highlight is that I have often said that the Bank of Canada is going to be there to support Canadians, Canadian businesses and the Canadian economy through the full length of the recovery. We need a complete recovery, and a complete recovery is a shared recovery. If we leave big parts of the economy behind, we’re going to have a smaller economy.
A shared economy draws people into the labour force, and that creates a bigger economy. It creates more room for the economy to grow. Obviously, that’s very good for those people who got drawn into the economy, but it’s actually good for everybody. It’s a self-reinforcing phenomenon.
What can the Bank of Canada do? We have a broad, macro tool — monetary policy — and we can support the recovery through the full length of the recovery. This is important to bringing the economy back to its potential and to keeping inflation at its target. If we are missing jobs, that means we’re missing incomes, and that means we’re going to have downward pressure on inflation and we’re not going to keep inflation sustainably at our target.
That was a long answer, but it was an important question.
Senator Ringuette: It’s very nice to see you again, governor. I will start with a question that was directed 10 years ago to the Bank of Canada. Our Canadian businesses are sitting on a huge amount of reserves, what I call dormant funds, and we still don’t know why they are not reinvesting. I know that you survey the business community on a regular basis. Do you have an answer as to why they are not reinvesting these reserves in Canada? What is happening?
Mr. Macklem: There are two aspects to that question, Senator Ringuette. One is — and this gets back to Senator Deacon’s question — the long-standing lack of investment in Canada. In the context of this particular crisis, as I keep coming back to, there are so many unique features of it. In fact, both households and businesses have large amounts of cash sitting in their bank accounts.
In the case of households, I think two things have been going on. One is that, particularly for people in the upper half of the income distribution, a lot of things they would normally spend their money on — travel, for example — they can’t do, so there is essentially a kind of forced savings that’s accumulating in their bank accounts. There are more than $100 billion of extra deposits sitting in banks, in household deposit accounts. At the bottom end, in the lower half of the distribution, the government programs have been very effective in replacing the lost incomes, so we haven’t seen a huge drop in their deposits. Overall, deposits are way up.
Somewhat in parallel, businesses have a similar buildup of cash. Part of that, both for households and businesses, has been precautionary. Particularly at the beginning of the crisis, nobody knew what was going to happen, and households, and particularly businesses, really hoarded cash.
They wanted any treasurer who had gone through the last crisis, in 2010, because the one thing they knew was cash was king. They wanted to make sure they had fortress levels of cash, so they could get through this. Businesses kept a lot of cash.
The combination of monetary and fiscal supports have meant that corporate and personal bankruptcies have been lower than usual, and much of that money is still in the system. That’s good news. On the consumption side, it means that households have the capacity to increase their spending as the economy reopens. For businesses, it means they have the capacity to invest.
Capital markets are open, interest rates are low, and there is good access to debt capital. Markets are strong, and there is good access to equity capital, so it comes down to businesses having confidence. You don’t invest unless you expect a return. Therefore, it comes down to businesses having the confidence that these investments are going to yield a return. As the economy is reopening, we are certainly hopeful that we’ll see more of that cash flowing.
Senator Ringuette: Governor, if I may, we have seen that same situation a decade ago. It hasn’t changed. Canadian companies are sitting on huge amounts of reserve funds and not reinvesting. What can we do?
First, I would like to know if your survey asked them why they are not investing when they have these reserves. If we know why, then maybe, as a Parliament, we can react to that with some kind of incentive, if it’s an incentive that is needed. Earlier, we were talking about dormant houses that were being taxed. Maybe if companies don’t want to reinvest, maybe the money could become taxable.
I’m going to the nth degree here, because I find it has not been a normal situation for the last decade. I do understand that during the COVID situation, it was not a period where companies made any investments. It should have been a period where they made investment plans for the future, but we don’t see that. My question to you is: When you survey the companies, are they telling you why they keep these reserves?
Mr. Macklem: As you’re well aware, this is a long-standing issue, and there have been a lot of studies. There is a whole list of factors. I could go through them, but I’m not sure that would be useful because we have had trouble sorting out what the key ones are.
What I can tell you is when you survey businesses in Canada, they tell you how much they are investing. They tell you how much risk they are taking on. It’s really only when you benchmark them against their competitors that you see that Canadian companies are investing, they are taking risk, but they are not always keeping up with the competition. That’s the problem.
I have talked to many businesses. For a long time, it was a puzzle to me. They all tell you how much they are investing and how many new opportunities they are seizing. Yet, you only notice the difference when you remember our competitors are not standing still. Our competitors are taking on risk. They are making big bets.
It’s becoming more important, because in a digitalized economy, where there are big network economies of scale, the biggest, most successful companies get an even bigger share of the market. So you have got to take that risk. You have got to be bold. That is a challenge in Canada. As Senator Deacon said, if we’re really going to grow our economy and our prosperity, we do need to rise to that challenge.
The Chair: I’m going to open up questions for a second round. I’m going to be a little bit more aggressive on the timing, because I want to ensure that senators who want to ask a second question have that opportunity. We have about 35 minutes, and you have been kind and generous in your comments. Senators, let’s keep the questions short.
Senator Wallin: You have talked, governor, about — and we mentioned it earlier — the importance of signalling how you think climate-smart capital flows and investment are important things to do. I want to ask about the resource sector, which is, in fact, becoming more innovative. Our oil and gas extraction are much cleaner than most of the other people we import oil from. Our carbon capture is leading edge. The agriculture sector has greened all of its processes. However, we’re seeing pipelines killed, we’re seeing increased regulatory environments and investment, both domestic and foreign, is dropping precipitously.
Most of the government support is for the kinds of programs: the plastic straws, the solar panels. How can we manage that transition and/or exploit that sector — the traditional resource sector — because it creates jobs and it’s a huge part of our GDP?
Mr. Macklem: The chair wants me to give shorter answers, so this will be tough.
The Chair: I know you can do it, sir.
Mr. Macklem: Let me focus on what the central bank can do. Obviously, climate change is a huge issue. It will be the defining issue for the next generation.
What is the Bank of Canada’s role? Well, part of our mandate is to foster a stable and efficient financial system. The financial system is not going to solve climate change, but it is key to allocating capital. The more capital we can get into sustainable investments, the better and smoother that transition will be and the more stable our financial system will be.
We have been doing analysis of this, and we have laid out some of it in our recent Financial System Review. What you see is that, in many cases, climate risks are underappreciated, meaning they’re underpriced. The risk that entails is, at some point, there will be a rapid repricing. That could destabilize the financial system.
We’re doing a number of things to try to help the private sector properly price and manage these risks. To give you a concrete example, together with OSFI and six large Canadian financial institutions, we are conducting a pilot program where we have developed climate scenarios for Canada that look at different transition scenarios. There is uncertainty out there. We don’t know exactly how this is going to play out, but we have teed off some global scenarios and have developed some Canada-relevant scenarios that address the fact that we do have an important resource — an oil and gas sector in Canada. That’s going to be an important aspect of the transition. These financial institutions are using those scenarios to see the impact on their balance sheets, which should help them manage those risks better.
I will highlight another thing that is working, mostly in the private sector, which is a taxonomy that has shades of green. Rather than just green and brown, there are shades of green, so that, for example, an investment in carbon capture and storage gets some green credit, even though it’s in a high-emitting sector. That’s a piece of financial infrastructure that can help high-emitting sectors gain access to capital to do the right thing and to accelerate the transition that they need to make. Those are the kinds of things where the Bank of Canada can be helpful.
Senator Wallin: Thank you very much.
Senator Smith: Sir, I will try to be a little more succinct than before.
What projections have the bank undertaken on the labour market as we move out of the pandemic? Based on your projections, will labour market conditions bounce back to pre-pandemic levels in the next year or two?
Mr. Macklem: I don’t have projections for precise labour outcomes for different cohorts, but we are expecting to see a strong rebound in economic activity through the second half of this year. The vaccination rollout has gone well. The economy is reopening. The U.S. is growing strongly. The conditions are really all in place for a very strong second half of this year and into next year. With that, we expect to see some strong employment growth. The last two months, obviously, with the third wave, we lost quite a number of jobs. We’re expecting those to come back in the months ahead and then build further on that.
If you look at where we are in the labour market, we’ve still got quite some way to go. We are about 575,000 jobs below our pre-pandemic level of employment. When you consider that roughly, in a normal year, an additional 200,000 people enter the labour market, there are roughly three quarters of a million jobs that we need to get back to get to a full recovery. So we still have some way to go.
We do think that through the next year we will get a lot of that back, but if you go back to our latest projection, we are not expecting economic slack to be fully absorbed until sometime into the second half of next year.
Senator Smith: Thank you very much, sir.
[Translation]
Senator Bellemare: I will try to be brief. Governor, your term just started. I know that setting the key interest rate and consulting internally is a complex process. I’d like to hear your thoughts on a practice used by a number of central banks that have monetary policy committees. As is the case in the U.S., New Zealand and England, the committees have internal and external members, who meet with the governor to discuss the situation, and set the key interest rate and the monetary policy parameters. Where do you stand on that practice, in other words, having an accountable monetary policy committee? In most of those countries, the committee’s proceedings are eventually made public. Where do you stand on that?
Mr. Macklem: Countries have slightly different systems, but overall, they aren’t that different. Most have a committee. We have a committee, our governing council. I don’t think the most important thing is to have full-time members internal to the bank or a few external members. The important thing is that the council’s membership reflect a diverse range of experience, expertise and perspectives. I think that’s important.
The other thing I want to mention is that systems differ. In the United Kingdom, for instance, each member has a vote: one member, one vote. Here, in Canada, however, we have a consensus-based system. To be perfectly honest with you, I really like doing things by consensus because it promotes a meaningful debate, in my view. Members really try to understand their colleagues’ views and take them into account. The idea is to capture everyone’s best ideas and have those around the table arrive at a consensus. I really like the consensus-based approach. If every member just shows up to cast a vote from time to time, the debate isn’t as rich as it could be.
Senator Bellemare: For regional representation, wouldn’t it be a better idea to have external members from different parts of the country?
Mr. Macklem: We have a big country, so regional perspectives matter. That’s an important part of diversity. I think there are a number of ways to find those perspectives. We have regional offices in Halifax, Montreal, Toronto, Calgary and Vancouver, British Columbia. Our board of directors members and our regional representatives are from every province. Regional diversity can be achieved in a range of ways, and I think we take it into account.
Senator Bellemare: Thank you.
[English]
Senator C. Deacon: Again, governor, thank you for the forthright and authentic answers you’re providing.
You opened the door on quantum computing. I read an article you wrote a couple of years ago on the enormous threats and tremendous prosperity opportunities that face Canada. We’re a great leader at this point, but we used to be in AI as well. We still are thought leaders, but we are not implementation leaders.
You recommended in that article that government, industry and universities collaborate. We haven’t done that well. The federal government should use all regulatory and procurement funding levers. You look at regulatory, and we are second to last in the OECD in that we have one the heaviest regulatory burdens, and we tend to use procurement to fund incumbents, not new entrants. We are not good at the things that you said in that article that we need to do in order to make our digital infrastructure quantum safe, and to take advantage of the huge global opportunity that’s sitting in front of us.
Where would you look elsewhere in the world? Canada does have to do this better. What programs and what other countries? Where would you look elsewhere in the world for models that could help to ensure we don’t miss this opportunity as, so far, we have missed the AI opportunity in large measure?
Mr. Macklem: Senator, I would like to talk about what the opportunity is in Canada and what we could do. I did write about quantum computing when I was dean of the Rotman School of Management and not the Governor of the Bank of Canada.
Senator C. Deacon: But you haven’t forgotten about it.
Mr. Macklem: I haven’t forgotten about it. Let me talk about what we are doing at the Bank of Canada.
As you are well aware, quantum computing — we don’t know if it’s 5, 10 or 15 years off — but when it comes, it is a severe threat to traditional cryptography. Basically, the kinds of cryptography codes that protect our system can be easily broken by quantum computing because the amount of computing power is so big you can crack these things. That poses a serious risk to not only our financial system but the whole economy.
This has nothing to do with quantum, but, sadly, we are seeing an increased incidence of very malicious, often profit-oriented cyberattacks.
You saw a cyberattack shut down an important pipeline in the U.S. recently.
These are a serious threat to our economic prosperity, and quantum really raises the risks.
At the Bank of Canada, we are doing a couple of things. First, we are partnering with leaders in quantum technology in Canada, because we’re starting to think about making sure our systems are what is known as quantum-ready, so that we will be in a position to protect our own system from quantum cyberthreats. The Bank of Canada has a pre-eminent position in the financial system; we have a bit of a platform. It is certainly our intention to use that to try to help the financial system more broadly make the investments they need to make to be quantum-ready. To that end, we are working with other parts of government and also some of the leading research centres in Canada on quantum to try to advance that. These are early days.
Just to get back to your Canadian thing, what does Canada stand for? Stability, security — we are good at this stuff. This is something we could really be good at, and let’s not miss the opportunity.
Senator C. Deacon: I couldn’t agree more.
Senator Loffreda: Governor, the consumer is often the motor of every economy, especially when it comes to an economic recovery. I mentioned previously that, according to the latest from the OECD, the Canadian household debt in 2020 was at 176%, which is the highest among the G7 countries, and the household savings rate is 1.2% in 2019, which is the lowest among the G7 countries.
How much of a long-term concern is that? Should we be worried? In 2020, there was an increase in savings rates, there were lockdowns and what-have-you. It was because of the lockdowns and many other issues, but if we look at long-term economic health and viability, is that a major concern? How do you see it, and what possible solutions could we bring to that problem?
Mr. Macklem: It is a concern. The Bank of Canada has highlighted high household indebtedness for some time.
In linking back to the discussion we had on housing, this housing boom you’re seeing is global, but I think what is different in Canada is that, pre-pandemic, we started in a situation with high household indebtedness and a very strong housing market. After a very brief dip, while the overall savings rate is going up — and some consumers are paying down debt, and paying down credit cards, in particular — other consumers are taking on more mortgage debt.
So even though consumer debt — credit card debt — is going down, overall household debt is still going up, driven by mortgage debt. As I mentioned, more than 20% of those are high-loan-to-income mortgages, which are the more vulnerable part of the segment of the market. That is a concern.
How sustainable is this? How much of a concern is it? It certainly doesn’t have to end badly. If the economy grows well and if people’s incomes are strong, they can sustain that debt and pay it down. But it does mean that we are more vulnerable. If we do get another serious setback, households have fewer reserves and households are carrying more debt.
The other risk is that the weight of the debt will constrain their ability to consume going forward if their income growth doesn’t keep up with their consumption and debt repayments.
As I said, it’s a vulnerability. There is certainly a way forward, but it requires good income growth, and getting back to Senator Deacon, it needs good productivity growth. We need an expanding economy that is generating incomes and wealth to make sure that is affordable.
Senator Loffreda: Thank you.
Senator Marshall: One of the vulnerabilities listed in your report is fragile corporate debt. Could you talk a little about that? This is the second time I’ve seen that vulnerability. Is it as a result of the pandemic, or did it exist before the pandemic? Could you just give us a little bit more information about that?
Mr. Macklem: First, senator, I’m so happy you’re reading our stuff so carefully. Thank you.
The short answer is that it is both. Like many of these things, there was a vulnerability before the crisis, and then the crisis has made it worse.
That is specifically referring to a fair amount of corporate debt that is of a speculative grade, high yield — some people call it junk bonds, but I will not use that term. So it is a fairly risky spectrum of the debt. It is higher yield.
The danger is that if there were something that caused a rapid tightening in global financial conditions — say there is a new variant or the recovery really stalls — right now, we have accommodating financial conditions, but suppose there were a real risk off, contraction and risk appetite, and a real tightening of global financial conditions, the risk is that the high-yield debt market — the spreads really widen. In the limit, the access to that market may get closed.
So companies that are relying heavily on high-yield debt are in a more vulnerable situation, and they risk seeing much higher debt costs or even their access cut off.
That’s really what that vulnerability is about.
Senator Marshall: Who is holding that debt? It’s not the Bank of Canada.
Mr. Macklem: We are more worried about the companies that are relying on it. Who is holding it —
Senator Marshall: They’ll collapse.
Mr. Macklem: Yes. The vulnerability is really about the companies that are relying on that.
Many of those are resource companies, and we know resource markets can be volatile, so that’s where the vulnerability is.
Senator Marshall: Thank you very much.
Senator Moncion: I have perhaps two or three comments. One of them is the vulnerability of the provincial debt. Can you talk about that a little bit in comparison with the overall Canadian debt?
Mr. Macklem: I’m the Governor of the Bank of Canada. Monetary policy is a big job. I leave fiscal policy for federal and provincial authorities.
One thing that distinguishes Canada is that provinces play a very important role. They have large budgetary expenses and large revenues as well. It is important that every province has a sustainable budget. They are all big enterprises in themselves. I’m not going to start to analyze the fiscal policy in all of the provinces.
Senator Moncion: No, I understand, but you provided a graph, and one of the items is provincial securities. I just wanted to understand the link because the bank’s total assets have shifted in composition, and there is a large portion that is — not a large portion, but there are titles that are being held.
Mr. Macklem: Yes. With respect to our Provincial Bond Purchase Program, that program was brought in during the depths of the crisis, when markets were completely frozen. It was a very important program to get fixed-income markets restarted in this country. We ran that program for a year. I don’t have the number in front of me, but I think we bought about $18 billion. That program has now ceased. We are not buying any more provincial government debt, and that really reflects the fact that markets are open and the provinces all have good access, so that is not needed any longer.
What I can also tell you is that program was not targeted to any province. The purchases of provincial bonds were roughly in proportion to the size of the province and the size of its overall debt in the markets. It was very much a neutral, proportional program reflecting the size of each province.
I think on June 25 or at least the end of this month, we will be publishing all the details of both our provincial and corporate bond programs because we committed that once those programs were completed, we would publish the details.
I can tell you that there are reference portfolios for both the provincial and the corporate programs, and the actual purchases are quite close to the reference portfolios.
Senator Moncion: Thank you. We were previously talking about the debt level of households, but the Bank of Canada monitors what Canadian banks provide.
How do you monitor the market that is outside of the banks, such as the mortgages that people get from brokers and from other groups that are not monitored?
Mr. Macklem: Well, I guess I would say two things. First, we do have a pretty concentrated financial system in this country, with a number of very large banks that have a large part of the market. We do have very good visibility to a lot of what is going on.
The other big players we have in the market are certain very large provincial financial institutions. For example, Desjardins in Quebec is a large financial institution that is not federally regulated but provincially regulated. There is something called the Heads of Regulatory Agencies, which I actually chair. It’s a committee of the Bank of Canada, the Office of the Superintendent of Financial Institutions, and the Department of Finance, and it includes l’Autorité Quebec, both the security and provincial regulator, same in Ontario, and the security regulator in B.C. and Alberta. Howard, as the chair, when he was at the Ontario Securities Commission, he used to come to this.
We do have various information-sharing abilities, so we do get information from the provinces. We do have a fairly good line of sight into the large, provincially regulated financial institutions as well, so that gives us pretty broad coverage.
Senator Moncion: Okay. Thank you. I know there are brokers that are not regulated and they will do mortgages that are —
Mr. Macklem: There is a certain amount of, what you might call direct finance that is not intermediated through the banking system or the credit union system. Yes, that would come more under securities regulation.
Senator Moncion: And you don’t monitor those?
Mr. Macklem: There are some measures of those, but they are not federally regulated in the same way as the banks.
Senator Moncion: Okay. Thank you.
The Chair: I might just make a quick comment, governor. You may disagree and not have a lot of information, but Senator Moncion knows that if we ever pass the capital markets stability act, which will be very much a cooperative in gathering important information on systemic risks and other matters, that will be a cooperative effort to try to gather more data. It may be of assistance and might get us closer to understanding some of the issues that Senator Moncion mentioned.
I am trying to avoid being a witness at this meeting, but I wonder if you might have a quick comment on that. If you don’t, I fully understand.
Mr. Macklem: It’s not really my domain anymore. It’s a project that I’ve worked on at the Department of Finance and in other parts of my career.
As I’ve said before, I think we really learned this in the last crisis, that having a good systemic understanding of the system is critically important. I will say that while there are still some important outstanding issues, we did learn a lot from the last crisis.
This crisis is unprecedented in its magnitude and speed, and our financial system has actually held up quite well. In important ways, it has actually been more of a shock absorber than a propagator. Banks were important in offering mortgage deferrals and helping companies get through this. We’re not out of this yet. Not every company is going to come out of this. There will certainly be some longer-term consequences, but our financial system has held up well and has been an important shock absorber. To an important degree, that does reflect the lessons learned in a way. Yes, there are some other lessons we should not forget.
The Chair: Governor, I think that concludes our meeting this evening. I very much appreciate you being here and spending a full two hours with us. I realize that’s a lot of heavy lifting, and your openness and frankness in answering many of the questions that senators had this evening is very much appreciated.
I want to thank you once again and thank you for your patience in arriving here. Perhaps we will be able to see you in the fall, perhaps after the next MPR, where we will have a discussion about those matters. We have taken notice of your June policy rate announcement as well as the Financial Markets Review, which you indirectly commented on a great deal this evening in talking about the vulnerabilities. We very much appreciate it.
Thank you, colleagues. I believe that concludes our meeting.
(The committee adjourned.)