THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Wednesday, May 1, 2024
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 4:14 p.m. [ET] to study matters relating to banking, trade and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello to everyone in the room and joining us online and welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I serve as the chair of this committee.
I have a few notes before we begin today. I would like to remind all senators and other meeting participants of the following important measures:
To prevent disruptive and potentially harmful audio feedback incidents during our meeting that could cause injuries, we remind all in-person participants to keep these new earpieces that are black away from your microphone. They have put handy, dandy little stickers on the desk here, and if you can remember to sit them there. This all came in a communiqué from the Speaker on April 29 following some incidents. So these are new measures to prevent audio feedback.
All earpieces have been replaced by a new model. This is to reduce the probability of feedback. The new earpieces are black whereas the former were grey. Please only use the black one; if you accidentally have a grey one, that would be an issue.
By default, all unused earpieces will be unplugged at the start of the meeting and just set aside. When you’re not using your earpiece, please place it face down — I know these are a lot of rules — in the middle of the round sticker where indicated.
There is a card on the table in front of you on guidelines to prevent audio feedback. Please ensure that you are seated in a manner that increases the distance between microphones. Participants must only plug in their earpieces to the microphone console located directly in front of them.
These measures are in place so that we can conduct our business without interruption and protect the health and safety of all participants, including, of course, our interpreters.
You have heard other messages on that as well about trying not to talk over one another and trying not to switch back between French and English in the middle of a sentence. It makes it complicated for them to do that. Thank you all for your cooperation.
Now, let me introduce the members of the committee that are with us today: Senator Loffreda, the deputy chair; Senator Bellemare; Senator Deacon, Nova Scotia; Senator Gignac; Senator Marshall; Senator Martin; Senator Ringuette; Senator Yussuff is here; Senator Varone, who is a new member the committee; we have also joining us today Senator Robinson; Senator Oudar; Senator Galvez; and Senator Cardozo. We have quite a team. We’re ready for you.
We have the pleasure of welcoming back Tiff Macklem, Governor of the Bank of Canada, along with Senior Deputy Governor, Carolyn Rogers. We’re pleased to have you with us today to update us on the Monetary Policy Report for April 2024. It comes on the same day, of course, as the report from the Federal Reserve in the U.S. so we have got lots of news to talk about. Welcome to you both, and thank you very much for joining us.
We will begin with your opening remarks, Mr. Macklem, go ahead.
Tiff Macklem, Governor, Bank of Canada: Thank you, chair. Good afternoon senators.
[Translation]
Good afternoon, everyone.
[English]
I’m pleased to be here with the senior deputy governor to discuss our Monetary Policy Report from a couple of weeks ago as well as our monetary policy decision.
In April, we maintained our policy rate at 5% and published a revised outlook for the Canadian economy. There were really three key messages.
First, monetary policy is working. Total Consumer Price Index, or CPI, and core inflation have eased further in recent months, and we expect inflation to continue to move closer to the 2% target this year.
Second, growth in the economy looks to be picking up. We expect GDP growth to be solid this year and to strengthen further in 2025.
Third, as we consider how much longer to hold the policy rate at the current level, we’re looking for evidence that the recent further easing in underlying inflation will be sustained.
Before taking your questions, let me take a moment to discuss recent economic data and the outlook for growth and inflation.
[Translation]
In Canada, growth stalled in the second half of 2023, and the economy moved into excess supply.
The labour market also cooled from very overheated levels. Employment has grown more slowly than the working-age population.
The unemployment rate has risen gradually over the last year to 6.1% in March. There are also some signs that wage pressures are beginning to ease.
Economic growth is forecast to strengthen in 2024. Strong population growth is increasing consumer demand, as well as the supply of workers, and spending by households is forecast to recover. Spending by governments also contributes to growth, and the strong U.S. economy supports Canadian exports.
Overall, we forecast GDP growth in Canada of 1.5% this year and about 2% in 2025 and 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026.
CPI inflation was 2.9% in March, and price increases are now slowing across most major categories of goods and services. However, shelter cost inflation is still very high and remains the biggest contribution to overall inflation.
Looking ahead, we expect core inflation to continue to ease gradually. The more timely three-month rates of core inflation are well below the 12-month rates, suggesting some downward momentum. But with gasoline prices rising, CPI inflation is likely to remain around 3% in the coming months. It is then expected to ease below 2.5% in the second half of this year and reach the 2% target in 2025.
[English]
As always, there are risks around this outlook. Inflation could be higher if global tensions escalate, if house prices in Canada rise faster than expected or if wage growth stays high relative to productivity. On the downside, economic activity globally and in Canada could be weaker than expected, cooling demand and inflation too much.
We don’t want to leave monetary policy this restrictive for longer than we need to, but if we lower our policy interest rate too early or cut too fast, we could jeopardize the progress we have made bringing inflation down.
Overall, the data since January have increased our confidence that inflation will continue to come down gradually even as economic activity strengthens. Our key indicators of inflation have all moved in the right direction and recent data point to a pick up in growth.
I realize that most Canadians want to know when we will lower our policy interest rate. The short answer is: We are getting closer. We are seeing what we need to see; we just need to see it for longer to be confident that progress towards price stability will be sustained.
In the months ahead, we will be closely watching the evolution of core inflation. We remain focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour as indicators of where inflation is headed.
To conclude, we have come a long way in the fight against inflation, and recent progress is encouraging. We want this progress to be sustained.
With that summary, Madam Chair, the senior deputy governor and I would be pleased to take your questions.
The Chair: Thank you very much. We’re going to begin that process today with our deputy chair, Senator Loffreda.
Senator Loffreda: Thank you to our Governor and Senior Deputy Governor of the Bank of Canada for joining us.
I’ll put forward the question and the supplementary at the same time. We are a trading nation, and close to 40% of our gross domestic product, or GDP, is exports with three quarters being to the U.S., which at this point is the strongest economy in the world. Any concerns on keeping pace with the U.S. economy and remaining competitive? How can monetary policy help us do so? Are you confident we’re on the right track with your monetary policy? Can monetary policy be a determinant in increasing our productivity, which has been lagging for decades? Increasing productivity definitely leads to increased prosperity and well-being, and, of course, competitiveness and keeping pace with the U.S.
Last, I would like to hear your insights on any possible link between our lagging productivity and monetary policy as high interest rates can be a disincentive to investment.
Mr. Macklem: Well, you have packed a lot into that question. Let me start with monetary policy and Ms. Rogers has recently given a speech on productivity, so I’ll ask her to say a few words.
Look, the biggest contribution monetary policy can make to productivity, to the good functioning of the economy and to the well-being of Canadians is to maintain low and stable inflation. The simple reality is in a market-based economy, prices provide the signals of where to invest, where not to invest, and price signals are clearest when inflation is low and stable. Companies don’t need to worry about the extra uncertainty caused by inflation.
I don’t think our productivity problem is related to monetary policy. Yes, higher interest rates will discourage investment and household spending — that’s partly how monetary policy works — but our weakness in productivity has been more than 20 years now. We have had very low interest rates. We now have high interest rates. We have had low productivity through that whole episode.
As I said, I think the best contribution monetary policy can make is to restore price stability.
Why don’t you say a few words about some of the other key determinants of productivity?
Carolyn Rogers, Senior Deputy Governor, Bank of Canada: Sure, I think maybe where I will start, Senator Loffreda, is why we chose to start talking about productivity when we did. I think I said this at the beginning of my speech is the Governor-in-Council really hasn’t talked about much other than inflation for about two years now, and that was by design. That was a thing that Canadian expected us to talk about. That was the thing we were 100% focused on. Now that we’re getting closer to our target, we still have work to do, but we have started to think ahead and what we see as a tougher environment to maintain price stability going forward.
Some of the things that helped us control inflation in the past decade or more are shifting. For example, demographics are shifting. As a population ages, the dynamics between consumption and savings shift. One of our former colleagues was here recently talking about that.
We’re seeing more climate shocks that have an impact on supply chains, and we have a much more fragile geopolitical environment that affects commodity prices and supply chains. These are all going to be headwinds to keeping inflation low and stable as we go forward.
We wanted to talk about productivity as a way to help build some resilience into our economy against those kinds of things. If you think of inflation as kind of the maximum speed limit the economy can grow before it starts to build inflationary pressure, if we can get our productivity up, we have a bit of a buffer against some of those headwinds that we see. That’s the connection we see between the productivity conundrum we have and the inflation challenge that we are likely to have ahead. That was why we wanted to enter the conversation when we did, and add our voice to many others that are talking about this issue.
The Chair: You added your voice in a very dramatic way. The language was quite vivid. I remember seeing the headlines and being taken aback a bit, which is “when you see that sign break the glass in case of emergency, well this is an emergency.”
Clearly, this has come into focus for you in a very dramatic way, not just kind of a subtle shift from inflation discussions to the productivity issue.
I know, as the governor said, it has been around for a long time, but what is it that provoked that kind of response?
Ms. Rogers: The things that I just described, what we see going forward as a challenge. I would say when we were coming out of the pandemic, you saw productivity numbers really take a dive, and that seemed logical but Canadian businesses showed a lot of resiliency, innovation and creativity to get through the pandemic. We were optimistic that might continue and we might see a pick up as we came out of the pandemic and conditions started to normalize. We haven’t seen that. In fact, we have seen things going the other way.
You asked a question about the U.S. economy as a big trading partner. We’re seeing a bigger divergence from the productivity levels in the U.S. and in Canada. I don’t know that the problem is necessarily bigger, but the motivation to fix it has to be bigger.
The Chair: We need to speed this process up? That is what you’re saying?
Ms. Rogers: Yes.
The Chair: We’ll come back to this issue, I know.
Senator Marshall: The Federal Reserve didn’t change their interest rate, so there is a lot of commentary out there now on what is happening. They are up there, and there are a lot of economies pushing to decrease their interest rates.
Could you talk about the implications of that for Canada? Because you have been optimistic that a rate reduction is coming. People think there is a rate reduction coming, and the U.S. isn’t of that mindset at all. I would think that’s going to impact your inputs on your assessments. I mean, the Canada dollar will probably be impacted as well as imports and exports.
I would be interested in hearing your views on that and how much of a concern that should be to us and to you.
Mr. Macklem: I’m happy to answer the question. Let me approach this in two ways.
The first point is that the Canadian data and the American data are evolving in a slightly different way. If you go back over the last six months or so, six months ago, the U.S. economy was getting some pretty good inflation readings, and our inflation was kind of sticky.
In the most recent three months, we have been getting some more encouraging inflation readings. In particular, core inflation, which had been kind of stalled, is showing some renewed downward momentum. One thing we look at, in particular, is that if you look at the more timely 3-month measures of core, they are now well below the 12-month measures, which are about 3%. The 3-month measures are well below that, suggesting that there is some further downward momentum. Of course, there could be new data. It could reverse that, but we have seen good progress.
More broadly, our economy has been much weaker than the United States. Monetary policy looks like it’s having more traction in Canada. We can get into why that might be the case, but, certainly, the structure of our mortgage market is different so there are some reasons why it’s not surprising that monetary policy is having more traction.
We have our own currency in this country. We have a flexible exchange rate, and that allows us to gear monetary policy for what is needed in Canada.
I think both the Federal Reserve and the Bank of Canada are asking themselves very much the same questions. I think we’re both looking to be more confident that we’re solidly on a path towards 2% inflation. I think the difference is that the data that is coming in in Canada has been increasing our confidence. To paraphrase the Federal Reserve chairman, this afternoon he said something along the lines that they have yet to become more confident.
With respect to moving, we don’t have to do what the Federal Reserve does. We can run our own monetary policy. Obviously, as you highlighted, what goes on in the United States and what the Federal Reserve does have a big impact on us. As Senator Loffreda highlighted, 75% of our trade goes to the United States, so the strength of demand in the United States impacts demand for Canadian exports, and our financial markets are very integrated. Our economies will tend to move somewhat in parallel, but we have some differences, and we have the ability to take those into account as we run monetary policy.
Senator Marshall: Those two things could stoke inflation, could they not? We also import a lot from the U.S., so it might be good for businesses who want to sell to the U.S. We’re also buying.
I’m trying to get an understanding of how concerned you are because how concerned you are would probably feed into how concerned we should be.
Mr. Macklem: Well —
The Chair: And do it all in a minute.
Mr. Macklem: There is no question that the common resolve of major central banks around the world to control inflation has helped every one of us. By reducing, particularly, global demand for tradeable goods, that has helped us all get inflation down, and this common resolve has helped keep inflation expectations anchored in all of our countries.
There is no question in my mind that the Federal Reserve is not wavering in their resolve to restore 2% inflation. They have some stronger data. They are seeing stickier inflation, but I don’t think that in any way is a comment on their resolve; it’s a comment on the data that they have.
[Translation]
Senator Gignac: Let’s talk about your preferred indexes for measuring underlying inflation. This is important because, in your introductory remarks, you said that you monitor that inflation to decide whether or not to lower rates. However, the economists at Mouvement Desjardins and the National Bank claim in their studies that your measure of underlying inflation currently tends to overestimate and is below 3%. What’s more, some economists are even recommending going back to the previous measure, the much-talked-about CPIX, which excluded eight volatile components, including interest, which would currently be at 2%, exactly on your 2% target.
Do you agree, and does the Bank of Canada intend to look at core inflation measures in the coming months, as your monetary policy may currently be too restrictive? I have a second question if your answer is concise enough.
Mr. Macklem: First of all, our preferred measures of core inflation — we use the word “preferred” because these are the empirically validated measures — are better related to the output gap and the evolution of inflation. It’s not just because we can look at our preferred measures, but we look closely at other measures of core inflation, such as the CPIX, as I mentioned earlier, and most countries use the CPI without taking food or energy prices into account. We also look at the distribution of inflation. The Monetary Policy Report provides charts that explain the proportion of CPI components that are rising faster at 3%.
It’s true that some indexes can give different impressions, and core inflation has come down a lot, but this 2% rate is still not normal. If you look, for example, at the entire distribution sector, 38% of components are now rising to above 3% — normally, that figure is around 25%. At one point it was as high as 40%; it’s much better now, but it’s still not normal.
I’m very pleased that Mouvement Desjardins and other accountants are taking a close look at our measures. I think that, when we renew our monetary policy framework in 2026, it would be worthwhile to determine what the best measures of core inflation are. As Ms. Rogers mentioned, we’ll probably have more supply shocks, so that’s an important consideration.
Senator Gignac: Regarding fiscal policy, during your last appearance, you mentioned that it would be important for monetary policy and fiscal policy to row in the same direction. In the budget that was just tabled, although the deficit is still $40 billion, because of the capital gains tax that will affect 0.1% of the population, budget spending is accelerating. There is talk of 6.7% growth next year compared with 2.7% in the past.
Do you feel that the Minister of Finance is rowing in the same direction as you?
Mr. Macklem: First, we are not responsible for fiscal policy — that is the role of parliamentarians — but we are responsible for monetary policy. Governments always have a lot of priorities. They have to make decisions. Second, we have to look at the fiscal policies of the provinces and the federal government, since we have to look at the total effect of the fiscal policies of all the provinces and the federal government.
Senator Gignac: But is the policy expansionist or is it neutral?
Mr. Macklem: You’re right to say that spending has gone up. Income has gone up, as well, for two reasons. The economy is expected to be stronger, so there will be an increase in income. In addition, there are new budget measures, such as the capital gains inclusion rate.
If we look at the net effect of all this, budgetary oversight hasn’t really changed. The budget came out after our forecasts published in the Monetary Policy Report, so we should look at all this closely and we’ll take it into account in our next forecast, which will be published in July.
But I don’t think the fact that the net tax plan hasn’t changed a great deal will have much effect on our forecasts concerning the economy or inflation.
[English]
The Chair: In terms of spending, $61 billion in new spending but only $22 billion in new revenue generation. That is a wide gap that you have to respond to.
Mr. Macklem: Well, there are new revenues coming from two sources in the budget. The net effect on the deficit is pretty small. There are new revenues coming from stronger forecasts for GDP, more GDP, more revenue. Then there are some new fiscal measures, the most significant being the higher inclusion rate on capital gains. Again, if you look at the fiscal track, it really hasn’t changed very much. The government laid down these fiscal guardrails which you know well, in particular keeping the deficit below 1% in 2026-27 and beyond as a proportion of GDP. They respected those guardrails and I think that is helpful. Importantly, they recommitted to those guardrails. I think that is helpful.
[Translation]
Senator Bellemare: Thank you for being with us, Mr. Macklem. I was reading your recent article produced for an economic policy research centre, where you noted the big challenges of current monetary policy, which include prolonged supply shocks and higher uncertainty, and which make it increasingly difficult to predict the future, since the models are based on the past.
You say that monetary policy tending to lower interest rates is still effective. Do you think this will be the case going forward? Don’t you think it’s becoming necessary to think about other tools, such as coordination with fiscal policy? Perhaps you could also include people from a variety of backgrounds in your conduct of monetary policy to get a better grasp of reality and the future?
Mr. Macklem: I think you are referring to a chapter I wrote in a publication of the Centre for Economic Policy Research, CEPR. I think the message in that chapter is that the events of the last few years are unprecedented and very complex. We have learned some lessons. I’m not going to review all those lessons, but I think it’s important to be an institution that adapts and is always in learning mode.
As for the key messages, yes, there will probably be more supply shocks and more volatility in the economy.
Another lesson that is not really new is that this is the first time generations of Canadians have really experienced inflation. What we saw was that most Canadians remembered the 1970s. We noted that Canadians really don’t like inflation.
As for involving other people from other backgrounds in monetary policy, I agree that this implies that we will need a diversity of opinions and experiences. We also need to follow more flexible models and put more emphasis on the supply side of the economy.
Finally, I agree that monetary policy and interest rates influence demand, but that they don’t really affect supply. Supply-side policies, productivity and greater flexibility in the economy will be more important in the future because there will be new challenges.
So these things are not in the domain of monetary policy, but rather of government and the private sector.
Senator Bellemare: I was wondering if it would be necessary in the future to conduct cost-benefit analyses of your policy for the public and for you, so you can operate better.
Mr. Macklem: We review our monetary policy framework every five years, and every time we have renewed that framework, a number of studies were carried out — you yourself were involved in some of those studies, so you’re know about that — and we asked ourselves a number of questions: Should the target be lower or higher? Should we have a dual mandate? Should we be targeting nominal GDP, for example?
We always look at the cost-benefit ratio of our framework and that of other frameworks.
I also think it’s important to learn from previous years, and the chapter you mentioned talked about that in particular. Our colleague Tony Gravelle gave a speech about the measures we put in place to stabilize the financial markets during the crisis, and we are still examining the effectiveness of the cost-benefit ratio of these policies. We’re still working on analyzing the extraordinary policies we put in place during the crisis. So you are seeing more of the results of that analysis.
Senator Bellemare: Thank you.
[English]
The Chair: Thank you very much. Sometimes the question is if you could move the target to 3%, you wouldn’t have to do the interest rate hikes. It seems simple to the outside world. Why can’t you just adjust that?
Mr. Macklem: Why not 4% or 5%?
My response to that is if you are going to change your target when it gets difficult, you don’t have a target. I am a firm believer. We have had this inflation target since 1995. It has provided a valuable anchor to the economy. It is what anchors expectations.
The last few years have been, by far, the biggest set of shocks we have ever had. It is not the first structural change or shocks we’ve had. We’ve systematically been able to bring inflation back to 2%. We are well on our way this time to bringing inflation back to 2%.
I do think it is important, and I think a strength of our regime is that every five years you do step back and take a hard look at the target. Is our monetary policy framework the best framework for Canadians?
I don’t think, on the fly, you ought to just throw the towel in because it is tough.
The Chair: Thank you for the answer.
Senator C. Deacon: Thank you, governor and senior deputy governor for being with us again. These are always important meetings for us.
One of the big differences between Canada and the United States is the gap in business investment per worker, particularly in data-driven industries. That caused us last year to study this deeply and issue a report in June entitled, Needed: An Innovation Strategy for the Data-Driven Economy.
We found that in too many cases, the conditions were not in place to generate the type of business investment that we think is necessary, and that it really is a factor of the conditions. I was thrilled when I read the speech Time to break the glass: Fixing Canada’s productivity problem because we might have used that title a year ago if we had been smart enough to come up with it.
Can you comment on what led you specifically to make the decision to be so forthright, which we think is really important. I will speak for myself, but with where we were a year ago, I felt it was very important.
I will be blunt: What does success look like from your standpoint in terms of the types of changes in priorities because this is going to require a change in priorities that are not being pursued right now.
Ms. Rogers: Well, you have packed a lot into that question.
Senator C. Deacon: Yes.
Ms. Rogers: I described the motivation of the speech and why we thought the Bank of Canada should enter the discussion at that point in time. It is really about looking ahead and thinking about how we build some resilience in our economy for what is likely to be — as much as the governor just described the success of our target and how we’ve managed to return even in the face of shocks, we expect to see more of those shocks. If we can build some resilience in our economy — and productivity is a really good way to build that resilience, I think that was the motivation.
Regarding the title, I have to give credit to an amazing speech writing communications team that we work with. I have had the two different reactions. I have had people tell us that it was a bit too forward, and I have had people say that it was a great way to get some focus.
The Chair: We don’t think so.
Ms. Rogers: Okay. What I would say is you talk about the report that you did. There is no shortage of reports, ideas and theories, but we have to actually do it, right? We have to implement some of these things.
It certainly wasn’t our intent to position ourselves as experts about what the policies are that need to be implemented and whether this policy is better than that policy. Our message was that there are a lot of good ideas out there. There are probably some that are easier than others to implement. It isn’t that the government has to solve this or the private sector has to solve this. This is going to take effort, commitment and change at multiple levels.
It was a bit of a call to action for everybody to seize on some of the ideas that are already out there and implement them.
Senator C. Deacon: For you, success looks like finally prioritizing this right across the economy — federally, provincially and across business?
Ms. Rogers: And work together.
Senator C. Deacon: And work together. I would say business is very much on that path, but I don’t think we have the experience, necessarily, provincially and federally in terms of what is required in policy changes because there is not enough business experience within government.
How do we get over that line? That is one of my concerns.
Mr. Macklem: I will add a couple of points.
An important reason why we really wanted to highlight this was because it has been a 20-year problem. But coming out of the pandemic, U.S. productivity has increased. Ours has been declining.
Senator C. Deacon: Yes.
Mr. Macklem: That gap, which is already too big, has been widening for the last two years.
Our companies that are competing against U.S. companies are losing competitiveness, and, ultimately, that is going to affect the standard of living of Canadians. Rising productivity growth is the fundamental source of rising standards of living. It does need a concerted effort.
The second point I will make, which is a little more positive, is that we have done some things in this country really well. If you look at U.S. growth from 2000 to 2020 — just before the pandemic — in both countries, it averages 2.2%. The difference is the source of that growth.
In Canada, we’ve done a much better job of including people in the labour force. We’ve had rising rates of, particularly, female participation. Our participation rates are well above the United States. We have had a very good immigration system. We’re good at integrating new Canadians into the labour market. Companies are good at hiring them, training them and employing them.
In the U.S., obviously, they’ve had some population growth and some immigration, but their growth has come much more heavily by increasing output per worker or productivity.
The issue for us is there are limits to how much we can replicate this growth strategy. The participation of women is closing in on the participation of men. There are limits to how many more people you can get to participate in the economy. We do need to keep focusing on our strengths.
It is the Stanley Cup playoffs right now. How do you win as a team? You focus on your strengths, but you also have to address your weaknesses, and our weaknesses are exactly the ones that you highlighted. We have weak business investment.
I’m not claiming this, but I thought this was a good analogy: We do a really great job of developing great hockey players, but then we give them wooden sticks when the Americans have carbon fibre sticks. So who is going to score the goals? We have to equip our workers with the best and the newest capital. We are having trouble doing that.
The Chair: Thank you.
Senator Petten: Lana Payne, the President of Unifor, has publicly called for lower interest rates and as soon as possible saying:
Interest rates are a big piece of why it is housing is so expensive. So in some ways, right now what you’re seeing is the Bank of Canada’s actions are also causing inflation . . . .
Given, once again, the rates were kept at 5%, how would you like to respond to Ms. Payne?
Mr. Macklem: We know Canadians would like to see lower interest rates. We would also like to see lower interest rates. It will be time to lower interest rates when inflation is solidly on a path back to 2% inflation.
We are getting closer. We have made a lot of progress. We are very conscious of the need to balance the risks. We don’t want monetary policy to be this restrictive for any longer than it has to be. We know it is squeezing Canadians.
But we have come a long way. This has been hard-won progress. The other side of that is that you do not want to cut too early or too quickly and jeopardize the hard-won progress you have made.
Yes, it is a balancing act, but if you look at how the economy is evolving, after stalling in the second half of last year, growth looks to be picking up this year. It probably will be choppy one quarter to the next, but we see it is picking up even as inflation is coming down.
It is working. The economy is turning the corner. There is downward momentum in inflation, and the short way to put it is that we’re seeing what we need to see. It is working. We need to be confident that it is going to be sustained. Once we have that confidence, it will be appropriate to lower interest rates.
Senator Ringuette: Governor, in your introductory remarks, twice you mentioned population growth. That is not a natural population growth in Canada. It is an immigration population growth.
From my understanding, the normal rate was 125,000, then it slowly went to 150,000 and pre-pandemic, it was around 200,000 a year for immigration.
Mr. Macklem: A little higher, actually.
Senator Ringuette: I’m looking at your Chart 15.
Mr. Macklem: Let’s look at Chart 15.
Senator Ringuette: Which is the demographic demand in the housing starts.
When you look at this chart, you say right after the pandemic for 18 months the Canadian natural population didn’t grow sky-high like that. All of a sudden, in 2023, instead of your average 230,000 demand in housing, you end up with a demand of 530,000 instead. That’s a difference of 300,000.
My question is how much interest and acknowledgment does all this data provide for the elaboration of government policy? I look at this, and all of a sudden I say, “Whoa.” Right after the pandemic — and I know there was a major outcry for labour, so the government response was to bring immigration to 350,000, I think it was, in 2023, and we end up with 300,000 in additional demand for housing. It’s creating a domino effect on everything.
My question is: What is the dialogue that you have in regard to the data and the analysis that involves your monetary policy with the different government departments?
Mr. Macklem: I see you have the Monetary Policy Report in front of you. I’m happy to see that. If you turn to page 8, actually, Chart 2-A shows you the population growth in Canada and Statistics Canada’s forecast for population growth. What you can see is that just before the pandemic, we were running around 500,000. It plummeted during the pandemic because the borders were closed. It then rose very rapidly coming out of the pandemic, and it is still expected to rise further through the first half of this year.
What you can see from that chart is that most of that increase in population growth is not permanent residents. It’s non-permanent residents, which includes a variety of categories — like students and temporary foreign workers — and you can see the part that really grew rapidly was non-permanent residents.
The government has now introduced a target of 5%. They haven’t announced exactly the implementation, so we had to make a few assumptions, but it will require a fairly dramatic drop in the population growth.
To get to your question, typically population growth has been rising gradually through time, so it’s very much in the background. Demographics are usually a very slow-moving thing, and over the two or three years of monetary policy, it’s not really a big factor. But when you have a big change in population growth — first way down, then way up and then going forward, it’s going to come back down — it is something that we very much need to understand.
There are a couple of elements to that. One is that you need to look at the economy in two ways. You need to look at GDP growth — or consumption growth — in total, but you also need to look at per capita because if there are a lot more people, the experience of individual households — I mean, basically what you’re seeing is on a per capita basis, consumption growth has been declining. Consumption has been declining, even though for the total economy, it has been rising. It creates a gap between individual experience and the aggregate experience.
The other thing you have to factor in is that overall population growth grows the potential growth of the economy. It means the economy can grow. You have more workers. You can grow more without causing inflation, but it also creates certain choke points. A critical choke point is housing.
The housing market was already very tight before the surge in immigration. It is not sufficiently flexible to adapt to this rapid rise in immigration, so you’re seeing rent price inflation running at about 8%. That’s impacting a lot of people.
Senator Ringuette: I’m still looking —
The Chair: We’re out of time, Senator Ringuette. We’ll have to come back on the next round. We’re well over the section.
Senator Yussuff: Thank you, governor and senior deputy governor, for being here. I’ll come back to the inflation issue.
Wage growth seems to have stabilized. One of the big issues is that when we started talking about inflation was how to get wage growth back to a reasonable place so we don’t continue to spiral out of control. That’s stabilized.
One of the things that I think Canadians have been saying — and different Canadians have been saying this — is that the impact of mortgage interest rates, both on the consumers that try to own a property but also on renters, is having a major effect on the overall inflation. As you know, that’s included in the basket of measurements that you have.
If you take that out, we would be at almost close to the target right now. I’m saying this to you not to poke you in the nose, but to say that some of your policies are contributing to the problem that you’re trying to solve. Because on one hand, workers and unions listen to the argument, and they are moderating their demands at the bargaining table, but on the other hand, you, as the central bank, still continue to put your foot on the gas because you haven’t let up one bit on interest rates, which is contributing to the challenge that we’re still facing to get it back to the 2% level.
Mr. Macklem: I have two comments. The labour market, which was very overheated going back a year and a half, has cooled, and fairly recently we started to see wage growth starting to come down. It’s still high given the weakness we have in productivity. We need to get productivity up and wage growth down. Productivity pays for higher wages without causing inflation.
There are more adjustments there, but one of the things that is giving us more confidence that we are getting closer is that that adjustment is taking place, and we are looking for that to be sustained.
With respect to our target of inflation, you’re absolutely right. Mortgage interest cost is a big contributor to where inflation is right now. That’s something we understand very well, and we can see through that. In fact, you often hear us say that we’re focusing a lot on core inflation, and there are a few reasons for that. One reason to focus on core is that it provides a systematic way for taking out things that are really high and things that are very low to get you a sense of where the centre of the distribution is.
Our measures of core inflation — particularly, if you look at CPI-trim — is systematically taking out mortgage interest cost because it’s a very big upside. It’s also taking out things that are below, and it’s still well above 2%. By focusing our monetary policy decisions, though, on core inflation, we are effectively looking through mortgage interest costs because it’s kicked out of that measure — CPI-trim.
We have said repeatedly that we’re very focused on core inflation, and one of the reasons for that is so we recognize that, yes, our own interest rate policy is raising mortgage interest costs. That’s how monetary policy works. In time, interest rates will come down. That will come down, so we can see through that.
Senator Yussuff: On productivity, I heard, Ms. Rogers, what you said about breaking the glass, but one of the challenges we have — there are two, anyway, that I see that haven’t been spoken about very much — is that in some sectors of the economy, we have little or no competition. We have oligopolies and monopolies that basically run this country, and nobody talks about it because it’s like a club. We don’t want to point our finger at the people if we want to say, “Hey, maybe if we get some competition, maybe price points will be very different here.”
Of course, interprovincial trade has some inherent challenges in how it protects those borders that are contributing to the broader problem, in addition to a number of other issues: training; spending by employers in this country have been relatively stagnant through the most part. It’s interesting when we talk about how we are going to deal with productivity, there is an absence of pointing the finger to some of the key players in the marketplace that are not contributing anything to this challenge that we’re faced with.
The Chair: We have about 30 seconds here.
Ms. Rogers: I can be quick. We agree with you. Interprovincial trade barriers and competition are both things that we mentioned in the speech. In fact, I referred to a report that the Commissioner of Competition put out recently describing some of what you’re talking about, so agreed.
The Chair: Thank you very much. I want to remind senators, please try to keep your questions as short as you can because it doesn’t leave our witnesses much time to talk.
Senator Varone: Thank you. This is my first meeting. I’m still uncomfortable in my skin as a senator and more uncomfortable being before you asking these types of questions. My background is home building. I was a home builder with my dad. He taught me how to drive a bulldozer before I learned how to drive a car.
Coming from that industry, you talk about shelter costs inflation running around 8%. I look at shelter having two baskets meaning home ownership and rental. You have full control over the home ownership and the mortgage interest rates that go with that basket. In the rental market, rent controls, which control about 80% of that rental market, hasn’t had a greater than 2.5% increase over the last 10 years. I’m confused or I need to be enlightened by how you get to 8% in shelter cost inflation when one side of that equation is absolutely controlled and the other one you have control.
Mr. Macklem: The number I gave you is actually for rent. If there is rent control, I guess your question is why is rental inflation 8%? Statistics Canada could take you through exactly how they surveyed this, but first of all, different provinces have different rules. There is rent control, but if I’m renting my apartment and I leave and somebody else moves in, they can raise the rent. A lot of renters are young people moving around, there is a certain amount of turnover.
Senator Varone: That’s only on the economic side. In controlled rents, that can’t happen, municipally controlled projects.
Ms. Rogers: There is enough turnover. Probably the units that are turning over have quite a bit bigger increase than 8% depending on what city you are in.
Senator Varone: That’s a sliver of the market.
Ms. Rogers: We can get you details.
Mr. Macklem: We can show you how Statistics Canada surveys this. Our job is to target CPI inflation. That’s what is in CPI inflation.
Senator Verner: One follow-up on the supply side that you raised as being crucial to housing. I read your report on productivity. What was glaringly absent to me as a home builder was what was not said in terms of productivity of municipal governments who are in full control of the approval process. Without them, you can’t build a house. When you push the productivity argument to the trades and the companies that are building — the land developers and the home builders — you’re forgetting about what it takes to get a building permit. That productivity — I hate to tell you — is probably the worst of that whole supply chain.
The Chair: Do you have a comment?
Ms. Rogers: Sure. The data I gave at the speech in Halifax, I actually met with some local businesses, including some people in the same business as you, some home builders. They talk about that.
You’ll hear us talk about regulatory certainty. What companies tell us — both home builders and other companies that go through an approval process be it municipal, provincial or federal level — they say, “Look, we can deal with the regulations, but it just takes way too long which creates all kinds of uncertainty which disincentives investment.” Absolutely, that is something that needs to be done both for the housing supply and for the productivity challenge to speed some of those up.
We are encouraged that we’re seeing efforts at all levels of government to try and work together to solve the problem, but after the comment I made earlier, that’s what it is going to take, both housing supply and productivity.
The Chair: Thank you very much.
Mr. Macklem: One particularly shocking statistic is if you look at time to completion, it’s going up. That’s negative productivity growth. That may be —
Senator Varone: From what starting point? Building permits?
Mr. Macklem: I have to check whether it’s the start or the permit. But either way, a lot of this is supply chain problems, it’s regulatory approval, it’s getting the infrastructure in place. As Ms. Rogers said, investors need certainty.
Senator Martin: Thank you. We have been talking about productivity in other sessions and again today. It is a concern. It’s really frustrating to hear that it’s a 20-year problem and it’s getting worse not better. My first question simply is as you do your fulsome look at the budget, will anyone at the bank be assessing the productivity impacts of Budget 2024? See if the government may respond to your suggestions?
Mr. Macklem: The short answer is no. We don’t evaluate specific government programs.
Senator Martin: With your expertise and the recent comments you made — Okay. We were pointing fingers earlier in terms of what is causing Canada’s productivity decline. I have a list of stats related to the federal department responsible for Canada’s productivity agenda. This was from the Finance Committee. Last year, $2.1 billion, hired 273 more people than planned and met only 34.6% of its targets. They are not aware of how much money they will be getting from Budget 2024, but they are asking for $6 billion in the Main Estimates.
This is the department responsible for Canada’s productivity agenda. It’s quite concerning to read these facts. I’m inviting your comments on the fact that the department responsible doesn’t seem to be doing its job very effectively.
Mr. Macklem: I’m not going to comment on a particular department. You might want to talk to the department. But, as Ms. Rogers said, the government itself is a big part of the economy. Governments need to improve their productivity too. They are part of the equation.
Part of that is some of the things we have talked about — regulatory approvals, interprovincial barriers. Part of it is just the efficient operation of the government. You look across major government services, there is potential for new technologies, new skills to improve the efficiency, improve the delivery and lower the cost, and yes, governments across the country should be making those investments.
The Chair: Thank you very much. We have gone through round one with committee members. We have a couple of questions from those joining us.
Senator Cardozo: I’ll try to be brief to give you the maximum time. My colleagues asked about interest rates. Would reducing the interest rate by even a small amount be a signal to the economy that things are easing up?
My second question is there seems to be a strong reaction to the government’s new position on capital gains tax. Do you have a concern, as some have said this will have an effect on innovation and investment?
Mr. Macklem: On the second question, we don’t comment on specific tax or spending initiatives. There are many elements of the budget which can potentially affect the economy, and we’re not in the business of evaluating each one.
With respect to your first question, yes, I think a cut in interest rates would signal, certainly, that we’re more confident that we’re on a track back to 2% inflation. It would be a concrete signal that we are starting to get the payoff of the difficult time we have gone through. Inflation has come down, growth is picking up and interest rates can come down. Yes, I think that would be a confidence booster.
It wouldn’t be a good thing, though, if we did it too quickly or too early and then inflation goes back up or gets stuck where it is. That would not be a confidence booster. That would mean we have a new problem.
That would be a confidence booster, but it has to be backed up by the evidence, and it has to be sustainable.
Senator Cardozo: Just on capital gains tax, what is your general thoughts about capital gains tax and the effect on the economy?
Mr. Macklem: You’re not going to draw me in on that one.
The Chair: The Bank of Canada doesn’t comment on government policies, particularly.
Senator Galvez: Thank you so much for being here with us today. I’m always learning from your testimony, governor.
We’re talking a lot about inflation, but not about the causes of inflation. I’m happy to hear today that you are saying that the pandemic and the demographics that impact labour and housing. I’m also very happy to hear you, for the first time, talking about climate shocks.
For example, the public asks, “What is causing inflation?” You have the Leader of the Official Opposition in the other chamber saying the carbon tax causes inflation. When they ask, “Where is the data?” he says, “Well, it comes from the Governor of the Bank of Canada.” So people believe that you must have said something. You have the opportunity to correct that, if that was wrong.
With respect to the United States, the U.S. has passed two major bills: The Jumpstart Our Business Startups Act, or JOBS Act; and the Inflation Reduction Act, without calling it climate change and without calling it sustainable jobs, but that’s what they are doing. They have injected a trillion dollars.
I was with a few colleagues at the World Bank in Washington, D.C., where I was listening to the change of their mission. The World Bank mission is now to end extreme poverty and boost prosperity on a liveable planet, which is fabulous.
They were saying that fossil fuels are inflationary and renewable energy is deflationary, and for that reason, we should move into innovation and competition.
Do you have enough tools to push in this direction?
The Chair: Let’s have some answers here. Thanks.
Mr. Macklem: We have been investing in tools to look at that question. There is no question that climate change is going to be the defining challenge of the next quarter century. It’s going to affect every sector in the economy.
The models we have right now are not really designed — we don’t really have an energy sector, we don’t have a renewal sector and we don’t have clean energy or fossil fuels in our models. We are in the process of building out that aspect of the models that we use for monetary policy to address precisely the questions that you’re looking at, which are what are the inflationary or deflationary consequences of climate change?
There is also the other element that you didn’t mention, which is important, and that is that we’re getting more extreme climate events, whether it’s storms, floods or forest fires. Those are affecting the economy. Those are affecting people. They are affecting people’s livelihoods. They are disrupting transportation. From a monetary policy perspective, what does that mean for the economy? How do we manage that? That is something we’re investing in.
Of the investments we have made, in the first phase, we’re looking more at the financial stability consequences of climate change. That work is very well advanced, and now we have been shifting more to the question you raised.
Senator Galvez: Thank you so much.
Senator Loffreda: Wealth is always created by the entrepreneur. I have often said that. During a recent meeting, the Parliamentary Budget Officer, or PBO, Yves Giroux, explained that there may be a correlation between the small business tax rate and the lack of productivity growth in Canada. He mentioned that there is a clustering of businesses near the limit of the small business deduction rate, which goes against the expected distribution. This suggests that some businesses may be refraining from growing. You did mention that one of the reasons was weak business investment and to equip our workers with new efficiencies and new investments.
Have you seen similar evidence, and what is the Bank of Canada’s perspective on the impact of the small business tax rate on productivity? The more we tax, the greater the disincentive is to invest and to create wealth and grow.
What additional insightful advice would you give our Senate committee on ways to promote productivity growth, if you don’t want to comment on the tax rate there? It’s just a fact that was brought forward by our PBO, and I think it’s an important fact to consider.
Ms. Rogers: You’re getting advice from the right person on these matters. It sounds like he has done a study on it, and he is giving you his view. As the governor said, we’re not tax experts, and it’s not our job to comment on that.
I would come back to the suggestions that were made earlier. Interprovincial trade barriers, we have seen studies about the impact to GDP. Other experts have looked at these things and have done an assessment. That seems like something we should be able to get done if we had the right level of cooperation and motivation to do it.
I think the work that is being put out by the Commissioner of Competition is interesting to consider. I think the things the governor mentioned earlier about making sure our workers are equipped with the level of training and tools they need to be as productive as they can possibly be on the job is important. I think it’s important, as we think about reshaping our immigration program, that we have in mind the jobs that we need and the jobs that we need in the future so that we’re making sure we can make new Canadians as productive as possible as quickly as possible.
These are things, as the governor said, that play to our existing strengths and fix some of the very obvious gaps that we have.
Senator Marshall: I have a general question. How much thought goes into the psychology behind your messaging because some of your responses, in my opinion, are muted, and then others are more robust. We get Senior Deputy Governor Rogers saying, “Break the glass,” and then for interest rate reduction, you were saying it’s within the realm of possibility, but your own policy says it’s going to take longer than expected.
Do you have standing parameters or is it just judgment at the time? For politicians, you almost just say what comes to your mind, but you, obviously, have to give some thought to your messaging.
How does psychology play into it? Because of what you said, everybody is expecting a rate reduction in June or July. Are you able to answer that? I would be interested in that.
Mr. Macklem: We’re not psychologists, but I can assure you, we don’t wing it.
What do we try to do? First of all, we have our decisions eight times a year. We want to take the decision when we get to the decision and we have the benefit of all the latest information so we can make the best decision possible. We don’t want to take the decision now about what we’re going to do sometime in the future because there is information still to come. What that means is that we are not going to put things on a calendar.
However, we are very clear about the things that we are looking at. What are the things we need to see? If we see this, how will that affect our thinking? We do that in a few ways. We do it through press conferences, we publish a summary of the governing council’s deliberations after each decision. You get to see what these things were — you can tell by how much space is in there. What were the things they were focusing on?
Senator Marshall: Do you think that sometimes you give people unrealistic expectations? When you say it is within the realm of possibility, a lot of people are hanging onto that now. They think their mortgage rates are going down.
Mr. Macklem: Yes. I was asked a very direct question: Is it within the realm of possibility? And I gave a very direct answer. I try to give as direct an answer as possible.
Ms. Rogers: The challenges that we have, Senator Marshall, is that we are often talking to two if not three audiences. Particularly when we have a rate decision, we have traders, we have market people who are looking to make money off the things we say. They are literally trading on language. We are extremely precise and careful in those situations.
Then we have a group of economists who are part of the craft, looking at how we are making our decisions. They are looking for something else. But the people who we really try to think about when we give speeches and do our opening statement and things like that are Canadians. What is really important to us is that Canadians understand what we’re doing, why we’re doing it and that they understand that we’re thinking about them and that we have their best interests at heart when we make a decision.
It gets tricky when we are talking to those three groups. That is why sometimes you hear us speaking one way and then we speak differently.
Senator Marshall: Thank you.
The Chair: That is an interesting point. Everyone has to do a little bit of juggling when talking about these issues.
[Translation]
Senator Gignac: Governor, let’s talk a little about what’s happening in the labour market. In Ontario, the employment rate for young people aged 15 to 24 has fallen below 50%. This is the first time in 20 years that has happened, with the exception of the pandemic. In the United States, that rate has remained relatively stable. A year ago, the unemployment rate was 5%; last month, it exceeded 6%. Economists at the National Bank are predicting that we are now heading for 7%. I’d like to discuss your unemployment rate forecasts. Unlike the U.S. Federal Reserve, you do not make your unemployment rate forecasts public. There are two parts to my question.
First, are you as confident as you were last fall that Canada will be able to avoid a recession? Second, in the interest of transparency, would you be prepared to do what the U.S. Federal Reserve has done and share your unemployment rate forecasts, given that this is an important indicator for us parliamentarians?
Mr. Macklem: Regarding your first question, there are always risks around our forecasts, but we now believe that growth is starting to move upwards. There will probably be a delay with the labour market adjusting a little more slowly than GDP, so yes, the unemployment rate could potentially rise further.
However, we don’t see a recession; that’s not in our baseline forecast. We haven’t seen a recession since the beginning, and even though many have said there would be a recession, we still don’t have one at this point. Yes, there are always risks around our forecasts, but as I’ve already said, it’s working. Yes, monetary policy is difficult for many people. It takes too long, everyone wants us to cut interest rates now, but it’s working and we’re on the right track. We don’t believe a recession is coming and I hope our forecasts come true.
Senator Gignac: However, GDP per capita in Canada has been declining for several quarters. We are now at 2016 levels, while the United States is at 12% above 2016 levels. So we don’t have a recession thanks to immigration. GDP per capita is down.
Mr. Macklem: You are right to say it: GDP per capita is declining.
Senator Gignac: So it’s a drop in Canadians’ standard of living. I understand that you think monetary policy is appropriate at this time. Would you be prepared to be more transparent, like the U.S. Federal Reserve, and make your unemployment rate forecasts public, so that we can discuss your forecasts in relation to the labour market?
Mr. Macklem: We publish our GDP forecasts, as you know, and we analyze the health of the labour market extensively. We have greatly expanded our labour market health indicators in recent years, especially during the pandemic. That was very important and it still is, but when more than 3 million Canadians are unemployed, it’s very important.
In our view, it’s difficult to get a summary of the whole labour market in one figure. If you look at our website, it provides the unemployment rate, the employment rate, and also participation rates — we look at young people, women and men.
So, it’s by looking at the indicators overall that we get a picture of the workforce situation, and that’s important in conducting monetary policy.
Senator Bellemare: We know that Sweden’s central bank has excluded fluctuations in mortgage costs from its inflation targets. Do you think you could do that in the future?
Mr. Macklem: I didn’t quite understand.
Senator Bellemare: Sweden’s central bank has excluded fluctuations in mortgage costs from its target. If we did that, we might have already hit our target.
Mr. Macklem: Our mandate is pretty clear: In Canada, it’s completely free. I think there’s a very good reason for this: Total CPI is the best measure of Canadians’ cost of living. In the conduct of monetary policy, we know that, when interest rates are lowered, the contribution of mortgages to inflation will fall. This is something over which we have greater control. When we make monetary policy decisions, we are aware of this and, as I mentioned earlier, we have focused on core inflation measures. Our CPI-trim measure excludes mortgage rate contributions to inflation almost every month.
[English]
In practice, we see through the implications of mortgage interest costs.
Senator Bellemare: So the probability that rates will be down later is probably higher than expected, if we do that.
Mr. Macklem: I will leave others to draw their own conclusions.
The Chair: What, if anything, does the bank do in preparation for what all of the experts are predicting — a tsunami of mortgage renewals in 2024-25, that there will be huge rates of defaults among people who bought a house when the interest rates were near zero and now have to renew at 5%? This will be a huge crisis.
Ms. Rogers: Yes. We have been watching mortgage renewals really closely.
I would caution you at some of the headlines. I have read them too. I get alarmed, but I look at the data, and the data is a better indicator of what is going on.
What do we know so far? If you go back to the start of the rate increase cycle, about half of the mortgages that were due to renew have renewed. Mortgage default rates are still at historical lows. Arrears rates — so late payments — have come back up. They were also at a low rate through the pandemic. They’ve come back up to about their pre-pandemic level. If you look at those as an indicator of credit stress in the mortgage market, they don’t tell a story of a high level of stress.
In fact, when we look at other credit data, we see a bit more pressure. If you use arrears or default rates, we see more pressure in non-mortgage holders, so renters. We talked about this; rent is a pressure as well. The data is not telling us so far that we have a mortgage crisis, as the headlines would tell you.
Now, we do know that there is a little more than another 40% of mortgages to renew. We also know that for those mortgages, the difference between what their payment was when they took the mortgage out and what their payment will be is bigger than the ones that have renewed so far.
What banks are telling us is they are reaching out proactively to those borrowers, and most of them are preparing. We see people holding larger savings or liquidity buffers. What we can surmise is that they are preparing to either buffer those payments or maybe pay down the principal of their mortgage. We have seen wage increases. That will help. People are curtailing their spending. What we see is Canadians are being prudent, and they are proactive.
Now, will there be pressure? There will absolutely be pressure. Will there be people who find that pressure is too much and that they need to make decisions about extending their mortgage —
The Chair: If there is 40% to go, then we are kind of in a wait-and-see mode on that?
Ms. Rogers: Yes. We are going to wait and monitor carefully, yes.
Senator C. Deacon: Thank you, governor and senior deputy governor, for being here.
Federal, provincial and municipal regulatory burden in Canada is among the most difficult and most challenging in the Organisation for Economic Co-operation and Development, or OECD. It affects every sector. We heard about building permit effects from a colleague earlier.
Businesses value regulatory certainty, but if we are going to start to deal with the challenge of our regulatory burden, we are going to have to see a lot of changes and agility brought into our regulatory process due to changing markets, business models and technologies.
Can you speak to the importance of regulatory modernization and agility in order to start to address our productivity gap because strong regulations that keep past practices in place don’t allow for innovation and don’t allow us to get those productivity gains.
Could you, perhaps, speak to that one issue?
Mr. Macklem: I don’t know that we can add very much.
Ms. Rogers: As a former regulator, maybe I could.
I would say there is good regulation and there’s bad regulation. Good regulators think about this. They try and keep pace. You have to keep pace with the industry you are regulating.
In my past, I was a bank regulator. The way our mandate was framed, it was framed in a way that says that you need to allow banks to take risks. Good regulators think about this. That is what I would say. Do they need to be constantly reminded that it is important? Sure.
Again, what I would come back to is that what we hear from businesses is that it is not so much the burden as it is the delay, the certainty. What we hear from businesses is, “Look, I know regulation is a fact; it is a cost of doing business, but what I need is I need the decision quickly so I can make my investment decision and I can go forward with my business.” The speed is something that we could work on.
Mr. Macklem: The only thing I would add is that if it was easy, it would have happened.
Different levels of government put different regulations in place. They are well meaning. They have a specific issue. Stripping them out and harmonizing them is a lot of hard work. The near-term return is not that high.
But we need to seize our opportunities, and housing is a really good example. I think there is broad recognition now — finally — that the fundamental issue in housing is supply, and that is going to require coordination at the municipal, provincial and federal levels.
We are seeing that there are conversations that have not happened before. This stuff is difficult, but, hopefully, when we’re faced with a serious situation, we can come together as a country, we can put our heads together, we can overcome our particular issues and find something that works better to make everybody better off.
Yes, it is hard, and my only bit of advice is that when there is a real issue, hopefully we can get focused and get results.
Senator C. Deacon: We identified in our report of last June that I spoke about earlier, Needed: An Innovation Strategy for the Data-Driven Economy, that digital standards are crucial as our economy digitizes, and the use of standards, codes of practice and certifications as an alternative to or being equivalent to regulations is a really important way of starting to catch up in some of these areas.
Have you thought about, spoken about or spent time on different forms of regulating and being able to be more agile?
Ms. Rogers: I think you are out of our area of expertise, Senator Deacon.
Mr. Macklem: We are not digital regulators.
I am sympathetic to the view that in a space that is changing very rapidly, a traditional approach of agreeing on a complicated set of rules is probably not going to be able to keep up with the pace of change, so yes, you probably need a more principle-based approach. But this is not our area of expertise, and it is a difficult area.
Ms. Rogers: The only other thing I would add to that is that we normally attach regulatory standards to organizations. Increasingly, what we see now is the traditional organizations that — and this is true in banking, for example, and it is true in technology. Activities that used to be done by banks are being done by non-banks, and all of our regulatory infrastructure and apparatus are attached to institutions, not activities. It gets very difficult to be as agile as some of these small technology firms are.
Senator C. Deacon: Got it. It’s a key point for me. Thank you very much.
The Chair: I think that is an excellent summary.
Senator Petten: I was reading the media release of your climate change commitments for COP 26. The commitments include:
. . . the Bank needs to understand the potential impacts of climate change on the macroeconomy and price stability. . . .
Can you please elaborate on this and how you are actioning that commitment?
Mr. Macklem: I spoke to this a bit in response to Senator Galvez’s question.
Our initial work was more focused on the price stability implications of climate change, and, in particular, if markets are mispricing climate risks and then they suddenly crystallize and you get a rapid change in valuations, what could that do to the financial system? We are continuing to do some more work. We recently published a couple of new pieces, including one looking at flood risk and the implications for the mortgage market.
We have been pivoting to looking at more of the macroeconomic consequences and the implications for inflation and, ultimately, for monetary policy. That work is ongoing. We need to build, basically, a clean, renewable energy sector into our models so we can start to analyze that.
I will take the opportunity, though, to highlight one other element. Our annual report as well as our climate risk disclosure report are scheduled to be tabled tomorrow. In addition to looking at the macroeconomic implications of climate change for the entire economy, we’re also looking at our own climate-related risks. We have a balance sheet. We have operations. We have assessed and quantified our own climate risks. We have various mitigation strategies to address those. You can read all about it tomorrow if it is tabled as scheduled.
Ms. Rogers: May I add one thing, Madam Chair?
The Chair: Go ahead.
Ms. Rogers: Many of the models we use in monetary policy — assessing financial risk and even in the regulatory environment to risk weight assets, banks and such — are based on history. We take all of the data and information we have learned over time, and we build a model to try to replicate the future.
This is one of the difficulties when we think about climate risk. That data is not in the history, so it is not in our models.
One of the things we have been doing a lot is scenario planning. Instead of thinking about using a historical model to assess a future impact, we start using data that climate scientists give us to say, “If we assume that as a scenario going forward, what are the macroeconomic risks and financial stability risks that materialize?” We are getting better at using scenario planning as a tool rather than models that are history-based. That is one of the things we are trying to do.
Senator Yussuff: Two brief questions, and I will put them to both of you.
In the most recent budget, the Minister of Finance announced some measures in regard to mortgage amortization. The bank has assessed that in the context of potential renewal challenges that we might face and how that might help the homeowner going forward. It does not solve the problem of higher interest rates, but it does give people opportunities to consider that might give them relief to help them maintain their property one way or the other.
Mr. Macklem: Yes, we did look at that because housing price inflation is such a big contributor to inflation.
That measure allows for longer amortizations for first-home buyers buying “new-build” homes. It is going to be important for those individuals because — as you said — the longer amortization will reduce their monthly cost, but it is a relatively small part of the market.
By focusing it on “new-build,” there is both a demand and a supply element. Hopefully, it stimulates more “new-build,” and if you want to increase supply, you need more “new-builds.” I don’t think it is going to cause a big increase in demand that is not matched by supply and create further inflationary pressure in the housing market.
Senator Yussuff: My second question is: There are about 900,000 — it depends upon the measurement used — or maybe 1 million people working in a precarious sector of the economy. These are Canadians who contribute in their own ways, who are, unfortunately, doing jobs that are menial and sometimes at minimum wage, and this has a huge impact on our productivity because they do not get access to training. In many cases, of course, they do not have employment standards protection.
Has the bank ever looked at this as a huge factor? Somebody is doing this work in the economy, but they are not accounted for in a way that will cause us to say, “We need to address this problem,” because you are talking about 900,000 to 1 million workers in the precarious sector of the economy who do not have the traditional benefits of those working in a traditional workplace in this country.
Mr. Macklem: We have done some work looking at different forms of employment and, obviously, precarious employment has been something that has been growing over time. I’m not aware that we have linked it directly. We have been looking at it in the context of productivity. We have quite a few researchers, so it’s possible that I missed something.
Ms. Rogers: Yes.
Mr. Macklem: We have been looking at it, certainly.
In response to Senator Gignac’s question, we have been looking at a wider range of the labour market indicators, and one of those things is looking at the dynamics of more precarious employment.
Senator Varone: My question deals with, again, my background as a homebuilder. There are two parts to it.
I want to get an understanding from you in terms of what impact the underground economy — the black market — has on the marketplace as you see it. I will recite two statistics.
Canada Mortgage and Housing Corporation, or CMHC, stated that there are 80,000 secondary units in Toronto — basement apartments. The City of Toronto says that they only have 11,000 on record. The CMHC further down in the article said that 80% of them are illegal.
To build an illegal apartment, you need a tradesperson. Homeowners are not doing it themselves. Most tradespeople are governed by their collective bargaining agreements that state that they are working 36 hours a week. I can guarantee you that they are not spending the rest of their time on their boat. They are working and they are doing so illegally. They are the ones who are producing these basement apartments that have an underground market unto itself.
Do we have a problem in Canada in terms of that underground market, and what kind of an impact is it having on the overall economy?
Mr. Macklem: That is not something we have done research on. We have historically done some research. Obviously, we are the producers of bank notes. The underground economy relies on cash.
Trying to estimate the underground economy is difficult because it is underground. We do have some estimates. I have not seen any recently, but historically, we have done some work on the use of cash in the underground economy. For example, we used to have a $1,000 note in this country. We got rid of that for a reason. The dominant uses were not in the formal economy.
The Chair: Speaking of those bank notes, could you give us your understanding of why the finance minister would raise the debt ceiling again for the second time in three years? The number goes, I think it is 16%, from $1.8 trillion to $2.13 trillion. Does that signal to you that they intend to do a lot more spending?
Mr. Macklem: I am not really aware of these plans.
The Chair: Any other comments? No?
Mr. Macklem: What I see is that the government has laid out fiscal guardrails and it recommitted to those fiscal guardrails in the recent budget.
Senator Galvez: You are right that it is important to take into consideration the extreme weather events that are happening.
I am sure you are aware that Canada is warming up three times faster than the rest of the world. The Arctic is warming up much faster. These extreme weather events are going to happen more often here in Canada.
The other consequence of the extreme weather events and destruction of infrastructure is the insurance issue. Actually, the only institutions providing the costs of this extreme weather destruction are insurance companies.
Do you have any data on the total cost of these extreme weather events, which is the data that you mentioned that you are trying to input? Because the only one available is from the Insurance Bureau of Canada.
Mr. Macklem: Yes. Actually, we rely on their data, as you do. If you graph the value of climate-related claims, it looks like that. There is no question it is going up. Yes, I would expect that it will continue to go up.
Senator Galvez: Do you think that certain areas at some time will not be insurable?
Mr. Macklem: I think if you look at international experience, you are already starting to see insurance companies pulling back from insuring certain risks. This is a serious problem. We rely on insurance markets to protect individuals. It is also an important element in how the financial system works. If you cannot get home insurance, you are not going to be able to get a mortgage. A bank is not going to write you a mortgage. If insurance becomes less available or more expensive, that could have broader consequences.
[Translation]
Senator Gignac: You have been generous for the past two hours and what you do is not easy, so thank you both very much for that. The Bank of Canada has had to deal with a number of shocks, including the pandemic and immigration, which have had an impact on real estate. On the other hand, transmission times seem to me to be faster in Canada than in the U.S. because of variable mortgages versus fixed rates, and the labour market is deteriorating faster in Canada than in the U.S.
Could you return to neutral policy faster than in the U.S.? Also, how does currency, if there is a divergence in monetary policy, enter the equation — in three minutes, if possible?
Mr. Macklem: I agree for two reasons, and I think we’re seeing more of the effects of monetary policy in Canada. First, you mentioned that the structure of our mortgage market is different: In the United States, it’s 30 years, and in Canada, it’s 5 years and there’s a variable-rate mortgage sector.
As Ms. Rogers mentioned, about half of mortgages have already been renewed and the rest will be renewed within two years. Today, people know that when they renew, rates will be higher and will affect their current spending.
The other aspect we’ve already talked about is productivity. In Canada, productivity is lower than in the United States, and growth is lower here, too. As for a potential divergence between the United States and Canada, yes, it’s possible. We’re going to manage interest rates for the issues we have here in Canada. We have a flexible currency and that can absorb the difference. There are limits to this flexibility: Our financial markets are highly integrated and that’s a factor we need to be aware of when making our decisions, but we don’t need to do the same thing as the U.S. Federal Reserve. We can have our own monetary policy in this country for Canadians.
[English]
The Chair: Thank you both very much, Mr. Tiff Macklem, Governor, Bank of Canada and Carolyn Rogers, Senior Deputy Governor, Bank of Canada. We appreciate your time as always.
I also want to thank you both for the invitation to the committee members here to meet with you at the Bank of Canada. It is a beautiful building, and we will have a chance to grill you on your own ground then. We appreciate that opportunity or maybe you’ll have questions for us, I’m not sure. Thank you so much for your time here with the Banking Committee. Thanks to all the members for your participation today.
Mr. Macklem: Thank you for your attention to everything we do.
(The committee adjourned.)