THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
EVIDENCE
OTTAWA, Wednesday, February 2, 2022
The Standing Senate Committee on Banking, Trade and Commerce met with videoconference this day at 3 p.m. [ET] to study matters relating to banking, trade and commerce generally, as described in rule 12-7(8).
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Before we begin, I would like to remind all senators and witnesses to keep their microphones muted at all times, unless and until they are recognized by the chair. I will also ask senators to use the “raise hand” feature to let me know that you have a question or comment. I would ask you, as is always the case, to be as brief and to the point as you can so that we can cover as much ground as possible.
With that, we will now begin the official portion of our meeting. Good afternoon everyone, and welcome to the first hearing of the Standing Senate Committee on Banking, Trade and Commerce. My name is Pamela Wallin, I’m a senator from Saskatchewan and I have the honour of being the chair of this committee.
I would like to introduce the members of the committee participating in today’s meeting, beginning with the deputy chair, Senator Colin Deacon of Nova Scotia. We have with us Senator Bellemare, also a member of our steering committee; Senator Gignac; Senator Loffreda; Senator Marshall; Senator Massicotte; Senator Quinn; Senator Ringuette; Senator Smith, who is also a member of the steering committee; Senator Woo; and Senator Yussuff. I was also told that perhaps Senator LaBoucane-Benson might join us, but I do not see her there for the moment.
Today we are so pleased to welcome the Governor of the Bank of Canada, Tiff Macklem.
Thank you for your cooperation, sir, because meetings were on, then off again, and we really appreciate your being with us. Also with the governor is Senior Deputy Governor Carolyn Rogers, to discuss a full range of issues including the changing role of the Bank of Canada, inflation, interest rates, quantitative easing, maybe quantitative tightening, and even cryptocurrencies. Welcome, and thank you all for joining us today.
Before we begin our questioning, I will ask the governor to start off our session with his opening remarks.
Governor Macklem, the floor is yours.
Tiff Macklem, Governor, Bank of Canada: Thank you very much, chair. Let me say how pleased I am to be here to discuss last week’s policy announcement and the Bank of Canada’s Monetary Policy Report. I am especially pleased to have Senior Deputy Governor Carolyn Rogers with me here today for her first appearance before this committee. She has joined the Governing Council at an interesting time.
Our message is threefold. First, the emergency monetary measures needed to support the economic recovery through the pandemic are no longer required and they have ended. Second, interest rates will need to increase in order to control inflation. Canadians should expect a rising path for interest rates. Third, while reopening our economy after repeated waves of the COVID-19 pandemic is complicated, Canadians can be confident that the Bank of Canada will control inflation. We are committed to bringing inflation back to its 2% target. Let me expand on each of these in turn.
The bank’s response to the pandemic has been forceful; throughout, our actions have been guided by our mandate. We’ve been resolute and deliberate, communicating clearly with Canadians on our extraordinary measures to support the economy and on the conditions for their exit.
We said we would end emergency liquidity measures to support core funding markets when market functioning was restored, and we did.
We said our quantitative easing program would continue until the recovery was well under way. We began tapering QE last spring and ended it in October. Last week’s policy announcement marked the final step in exiting from emergency policies.
We said exceptional forward guidance would continue until economic slack was absorbed. With the strength of the recovery through the second half of 2021, the Governing Council judged this condition has now been met, and so we’ve removed our commitment to hold our policy rate at its floor of 0.25%.
Second, we want to clearly signal that we expect interest rates will need to increase. There are a lot of factors contributing to the uncomfortably high inflation we are experiencing today. Many of them are global and they reflect the unique circumstances of the pandemic. As the pandemic fades, conditions will normalize and inflation will come down. However, with Canadian labour markets tightening and evidence of capacity pressures increasing, the Governing Council expects higher interest rates will be needed to bring inflation back to the 2% target.
[Translation]
Finally, Canadians can be assured that the Bank of Canada will control inflation. Prices for many goods and services are rising quickly, and this is making it harder for Canadians to make ends meet — particularly those with low incomes. Prices for food, gasoline and housing have all risen faster than usual. We expect inflation will remain high through the first half of 2022 and then move lower. There is some uncertainty about how quickly inflation will come down because we’ve never experienced a pandemic like this before, but Canadians can be assured that we will use our monetary policy tools to control inflation.
Let me turn now to our economic outlook and the monetary policy report. Globally, the pandemic recovery is strong but uneven and continues to be marked by supply chain disruptions. Robust demand for goods combined with these supply problems and higher energy prices have pushed inflation up.
In Canada, consumer price index inflation is currently well above our target range, and core measures have edged up. Inflation is expected to remain close to 5% in the months ahead, but pressures should ease in the second half of 2022, and inflation should decline relatively quickly to around 3% by the end of the year. Further out, we expect inflation will gradually return close to the 2% target in 2023.
Measures of inflation are broadly in line with our own forecast, with longer-term expectations remaining well anchored on the 2% target. The Governing Council agreed it is paramount to ensure that higher near-term inflation expectations don’t migrate into higher long-term expectations and become embedded in ongoing inflation.
In October, we projected the output gap would close sometime in the middle quarters of this year, but growth in the second quarter of 2021 was even stronger than we had projected, and a wide range of measures now suggest economic slack is absorbed. Employment is above pre-pandemic levels, businesses are having a hard time filling job openings, and wage increases are picking up.
The rapid spread of the Omicron variant will weigh on growth in the first quarter, but our high rates of vaccination and adaptability to restrictions should limit the downside economic risks of this wave. We forecast annual growth in economic activity will be 4% this year and about 3.5% in 2023, as consumer spending on services rebounds and business investment and exports show solid growth.
[English]
Putting all this together, the Governing Council concluded that, consistent with our forecast, a rising path for interest rates will be required to moderate spending growth and bring inflation back to target. Of course, we discussed when to begin increasing the policy interest rate. Our approach to monetary policy through the pandemic has been deliberate, and we were mindful that Omicron will dampen spending in the first quarter, so we decided to keep our policy rate unchanged last week, remove our commitment to hold it at its floor and signal that rates can be expected to increase going forward. The timing and pace of those increases will be guided by the bank’s commitment to achieving the 2% inflation target. This ends our emergency policy setting and signals that interest rates will now be on a rising path. This is a significant shift in monetary policy, and we judge that it is appropriate to move forward in a series of steps. By being clear and deliberate, we’re really trying to cut through the noise, so that monetary policy is a source of confidence, rather than another source of uncertainty.
Let me say a final word about another important monetary policy tool — our balance sheet. The bank will keep its holdings of Government of Canada bonds on its balance sheet roughly constant, at least until we raise the policy interest rate. At that time, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing Government of Canada bonds to roll off. As we’ve done in the past, before implementing changes to our balance sheet management, we will provide more information on our plans.
With that, senators, Senior Deputy Governor Rogers and I will be very pleased to answer your questions.
The Chair: Thank you, governor. I really appreciate that. You have raised many questions. I will interject from time to time because I have a few questions myself, but I would like to begin our formal round today with the deputy chair Senator Deacon.
Senator C. Deacon: Governor and Senior Deputy Governor Rogers, we are very pleased to be here with you today. I want to focus on those Canadians who do not own their homes. Many of them are subject to rent increases [Technical difficulties] with the huge increase we’ve seen in housing prices and the “reno-viction” phenomenon that is occurring in the country. They are seeing higher costs for food, gas, oil, heat. On the other side, people are not seeing many wage increases.
We have seen from the report that was prepared for ESDC that wage growth in Canada has trailed even our sluggish productivity growth by about 1% per year. With rising interest rates at this point in time, rising inflation and no prospects at this stage of wage increases, we’re starting to see our monetary policy having a disproportionate effect on those at the lower end of the income scale.
What are you seeing as your possible tools or actions that you could be taking in monetary policy terms to understand and help to alleviate the pressures that those Canadians are clearly feeling at greater rates of inflation today [Technical difficulties] and probably even greater rates into the future? Thank you.
Mr. Macklem: Thank you, Senator Deacon. We were having a little bit of trouble hearing you, but I think I have the gist of it. It starts with getting inflation down. We’re very conscious that rising food prices, rising gasoline prices, rising prices for many goods, are impacting Canadians, and they do have a disproportionate effect on lower-income Canadians. We have heard very clearly from Canadians that when inflation is high — and it is too high — it is tougher for them to stretch their incomes to pay their bills. The first thing to do, consistent with our mandate to help particularly lower-income Canadians — but really to help all Canadians — is to bring inflation down to the target. I want to give Canadians some assurance that we are confident that inflation will come down.
Let me just underline that the inflation that we’re seeing now reflects, in many ways, the very unique circumstances of this pandemic. With the restrictions that we and everyone around the world have been dealing with, households cannot buy a lot of the services they want, so they’ve shifted into goods. So, globally, demand for goods is very strong. At the same time, global supply chains are impaired. Companies cannot produce as much because they have to slow down production to deal with local restrictions. Transportation bottlenecks have emerged. That has driven up goods prices in a very unusual way.
As the pandemic recedes, those bottlenecks should work through. Things should normalize. Households will be shifting away from goods, back to services, taking some pressure off. All of that should take pressure off of goods prices.
It is going to take some time. There are backlogs. We do think inflation, unfortunately, will remain at close to 5% for roughly the first half of this year, but then we think it will come down reasonably quickly in the second half of the year to about 3%. The next leg is getting it down from 3% to our target of 2%, and that will require higher interest rates. Capacity is now absorbed and our economy has recovered. It has recovered actually quicker than we thought it would. That is very good for all Canadians. Job growth has been strong. Wages are going up; they are back to about pre-pandemic levels. Wages intentions indicate they will probably go up further.
I wholeheartedly agree that has to be backed by productivity gains. Perhaps I can come back to that later, but we do need higher interest rates to dampen spending going forward. Capacity has been absorbed. We need to bring spending in line with supply and get inflation back to 2%.
If you look at our forecast that we published in the Monetary Policy Report, we have inflation coming back to target, and we also have good growth. We have growth of 4% this year, 3.5% next year. That does mean, certainly, in that projection, there are jobs; there are rising incomes for Canadians.
[Technical difficulties]
The Chair: Governor, if I may follow up for a moment, there are those in the financial industries, the bank presidents, who expected in the days post the worst of the pandemic that consumers would go on a spending spree. You have outlined the difficulties in doing that, both with goods and services. You were, I think, more of the school that Canadians tend to save and practise austerity.
What are you actually seeing? You also talked just a moment ago about interest rates rises being needed to dampen spending.
Mr. Macklem: Look, we are seeing a consumption-led recovery. We have said for some time that we expected strong growth through the second half of last year. In fact, it has come in even stronger. The latest GDP numbers that just came out yesterday reinforced that view that strength, particularly growth in the fourth quarter, was strong. That is really why we now judge the capacity as absorbed.
With respect to this debate about consumers, we all think there is going to be — and we’ve already seen it — strong spending growth by households. The other part of it, though, as I mentioned, is that households have been unable to buy a lot of the services that they like. Going on vacations, going to restaurants has been difficult, if not impossible, and as a result of that they have accumulated a large amount of what we call “excess savings.” The balance sheet of Canadians has improved.
The question going forward is: What are they going to do with those extra savings? Built into our projection, we assume that they are going to spend about 20% of that excess savings over the projection. How do we come up with that assumption? We surveyed Canadians and we listened to what they told us they were planning to do. That assumption is roughly in line with our survey evidence.
As we highlighted in our Monetary Policy Report, there is a risk they actually spend more than that. We think that as things reopen, the growth in demand for goods will slow down and the growth in demand for services will go up. But given that they have these extra savings, yes, you could see strong growth continue in both. That would give us even stronger growth than we have got as a projection. Other things equal, that would mean that interest rates would likely have to go up more to dampen spending and bring it down in line with supply.
There are also risks that consumers actually save more of their accumulated savings. So far, even with the strength we’ve seen in consumption, they have not been dipping into that excess savings. It is still actually building up.
So the bottom line is I think our assumption is reasonably balanced, and overall the risks in our projection are reasonably balanced. It is clear that interest rates need to be on a rising path. The slope of that path is going to depend on economic developments, and if consumers spend more, the slope of that path is likely to have to be steeper.
[Translation]
Senator Bellemare: It is my turn, Mr. Governor, to welcome you. I am pleased to be able to discuss these very important issues with you.
I would like to thank you for including in the new agreement considerations that confirm that you will, and I quote:
. . . consider a broader range of labour market indicators to actively seek the level of maximum sustainable employment needed to keep inflation on target.
This is not the dual mandate, and it is somewhat less than what many economists were calling for, but it is a step in the right direction. At least Canadians can be reassured that the Bank of Canada is taking into account the impact of these policies, especially the rising labour market indicators.
I would like to come back to the Monetary Policy Report. We can see that the Bank of Canada’s task is extremely difficult right now because inflation, as you pointed out, is a global phenomenon. This is a problem that affects everyone. Much of the solution lies in the recovery of supply chains and inflationary expectations that must not get out of hand. All this is a puzzle that is not easy to build; monetary policy is rather general in its scope and application.
My question is this: How can monetary policy be adjusted to also ensure it supports supply chain recovery and an inclusive recovery out of the pandemic? Wouldn’t it be desirable to also use fiscal policy to have targeted effects on monetary policy, effects that would encourage a recovery in supply chains and reduce the pressure on the wealthiest consumers?
You announced that interest rates or the key rate will rise. I think increases are normal, because the rate has been low for too long. However, we know that these increases will affect the most vulnerable of the population, people who have mortgages and make budgets every week. How do you see tax tools and coordination in this?
Mr. Macklem: Thank you, Madam Senator. First of all, I would like to thank you for your commitment to the debate on our mandate. I am very pleased with the mandate announced by the Minister of Finance last December. It is clear that our inflation target is still at 2%, and that remains our primary objective.
As you just mentioned, we have clarified the role of employment in our decisions. I hope you have seen our recent monetary policy where we have described — as you just mentioned — a broader range of labour market indicators. What you see when you look at these indicators is that the strongest indicators, such as the employment rate, the unemployment rate, and the labour market participation rate, are about the same as they were before the pandemic. There are also measures to ensure that the recovery is inclusive.
As you will have noticed — and I focused a lot on this — it was a very uneven recession. All the uneven recessions are experienced and are particularly severe for women, young women, mothers and low-income working women. Thanks to the reopening of the economy and the services sector, we have seen that this disparity has greatly decreased. There is very good news, and that is that the she-cession is now over. Women’s employment is now at a higher level than before the pandemic. However, there are some sectors, such as restaurants and tourism, where there is still unemployment.
The monetary policy is a macroeconomic instrument that cannot target a particular sector. Budget measures are targeted; new targeted measures have been put in place for the most affected sectors. With Omicron, those are the same sectors that are being the hardest hit. As we saw in the second half of 2020, when Omicron recedes, we are confident that the basic demand on the economy will be quite strong. Households want to consume more services, so we think that these sectors will be stronger in the future.
The supply chain issue is a global phenomenon. The United States and other major countries have put in place some measures to try to reduce these logistical problems in ports and in transportation. In Canada, I think investments in our ports will be significant. I know that there are already a few ports, such as Vancouver and the Port of Prince Rupert, where investments are under way. Efforts by federal, provincial and municipal governments to improve things and reduce these bottlenecks will be welcome.
Senator Massicotte: Welcome, Mr. Macklem. It’s a pleasure to see you again. You hold an important position, and I wish you well in your new position.
Could you comment on how the market and consumers have responded over the last nine months? We have learned from various daily newspapers that people no longer trust existing institutions when it comes to inflation. There has been a panic among consumers and investors. You tried to reassure them, but the rate seems to have increased more than you had anticipated.
You gave a speech explaining why it happened. You talked about foreign investors in real estate and the market response. There was a real sense of not being in control of the situation.
It is fundamental to have confidence in our institutions, but on that occasion, we felt something quite the opposite. That is why I would like you to explain what happened.
Mr. Macklem: Thank you for your question. I would like to take this opportunity to talk more about our analysis and forecast for inflation. In our Monetary Policy Report, you will see some charts that explain all of this in detail.
As I mentioned, most of the inflation we are currently experiencing is due to the large price increases for a number of goods that are being negotiated globally. In chart 9 in our Monetary Policy Report, we can see that the current inflation rate is close to 5% and that about three percentage points of that inflation rate reflect the sharp increases in the price of goods where there are supply chain issues. This mainly affects motor vehicles and appliances.
It also includes food, because crops have been weak around the world because of weather conditions. In Canada, there was a drought in the West, while a number of countries had other problems. We expect that to ease as early as the second quarter of this year.
Typically, when the inflation rate is 2%, the price of services goes up to about 3% and the price of goods goes up about 1%, so the average is 2%. In the last 25 years, the inflation rate has always been very close to 2%.
The current circumstances are unique. The price of goods is rising by about 7%, while the price of services is rising closer to 3%, so the average is much higher than our 2% target. It is at 5%, and there are good reasons for that.
As restrictions related to coronavirus begin to decrease, there will be a normalization of demand and production of goods. These upward pressures on the price of goods will diminish. That is why, for the second half of the year, we anticipate a fairly rapid decrease in inflation on the price of goods. This may even happen faster than expected, as our forecasts do not suggest real price decreases, but only to a decrease in the rate of price increases. It is possible that the price of certain goods will fall and that the inflation rate will fall more quickly.
However, yes, there is uncertainty about these bottlenecks, and it is difficult to predict everything. We have never had to reopen an economy after a pandemic, so it is something new and, in that context, I think we have a fairly balanced forecast.
I would also like to point out that with a strong economy and an output gap that is virtually zero, higher interest rates are needed for two reasons. First, to keep inflation expectations of 1% firmly anchored. Second, to moderate demand growth and return to a more supply-driven market.
We expect that an upward trajectory in interest rates will moderate demand and, as I just mentioned, the curve of this interest rate increase will depend on what happens and what our forecast is for inflation, because we are determined to bring it down to 2%.
Senator Massicotte: I would like us to discuss business investments. You seem very optimistic in your report about the growth of business investments.
Moreover, for several years now, Canada has been far behind the Americans. Canada is lagging behind in terms of the market, and there seems to be a reluctance on the part of the government to issue outward loans, which I think is a negative. How do you explain that?
You are currently optimistic, but do you think that Canada may catch up with the United States? What are your comments on this?
Mr. Macklem: I think there is good reason to be optimistic. During the pandemic, businesses showed that they could adapt by increasing their digital investment, which is one of the reasons why the impact of the pandemic was less severe than anticipated.
Today, we all attend virtual meetings. Last January, one-third of Canadians were working from home. We have found different ways to shop and entertain ourselves at home virtually. This reflects the significant digital investments that businesses have made during this crisis. This is likely to continue. The digital economy has come a long way and is evolving rapidly; this must continue.
There is a strong growth in consumption. The U.S. economy has strong external demand, so demand for our exports will remain fairly robust. Business performance is variable, but on average businesses are in a good position.
According to a survey of companies on their prospects, their investment plans are among the strongest since 1999, when we started surveying companies.
I think there is good reason to be optimistic. I agree that it is very important for businesses to make those investments. Next week, I will be speaking to the Canadian chambers of commerce, and I will be sending them the same message.
Senator Massicotte: Thank you.
[English]
Senator Loffreda: Thank you, Mr. Macklem, for being here with us. I wish to ask you about the purpose of the reinvestment phase and how long you expect to keep the Government of Canada bonds on the balance sheet. I was reading in The Globe and Mail over the weekend that the bank ended its last emergency response measure with the elimination of forward guidance, and you did briefly mention that, but then was surprised to read on your website that you are continuing with the reinvestment phase at $433 billion worth of Government of Canada bonds. That’s a significant commitment.
How long do you expect the reinvestment phase to last?
I have a quick question on the growth as that too is an uphill climb because we are in the middle of an Omicron shutdown. The same week, the IMF released its growth forecasts downward, and there is every expectation that you will be increasing interest rates at the next opportunity, and the consumer is the vehicle of every recovery for the economy.
Mr. Macklem: Thank you, senator.
Maybe I’ll just begin by giving you a few facts, and then I’ll speak more directly to your question. The short answer is that is ultimately a policy question, and we will take those decisions in steps going forward.
To go over where we are on our balance sheet, before this pandemic, it was at $120 billion. It’s now at $500 billion. To a large degree, that is made up of Government of Canada bonds, about $425 billion.
As for the quantitative easing program — at its peak we were buying $5 billion a week — we have secondary market purchases on our balance sheet of $300 billion. So if you go back to last spring, we were tapering or reducing our purchases. As the recovery gained strength, we indicated we didn’t need as much quantitative easing, and we gradually reduced that in steps of $1 billion — 5, 4, 3, 2 — and in October we ended our quantitative easing program and entered the “reinvestment phase,” which means we maintain our overall stock of Government of Canada bonds relatively constant. We set a target of $4 billion to $5 billion a month, which works out to roughly $1 billion a week. What you can see is that in the last several months we’ve been around the $1 billion a month mark.
Last week we indicated that once we raised the policy interest rate, we would consider allowing those government bonds to begin rolling off our balance sheet. Effectively, it means that as they mature, we wouldn’t be purchasing new bonds to replace them, so that our balance sheet would start shrinking. That’s called “quantitative tightening.” I would underline that our primary instrument for reducing monetary stimulus is raising our policy interest rate. We have a long experience with raising and lowering our policy interest rate, we understand the channels, and we have good estimates of the impact that would have on the economy. We view that as our main instrument, and, as we’ve signalled very clearly, interest rates need to be on a rising path to dampen demand.
If and when we choose to start quantitative easing, that would supplement it. The effect would be further out on the yield curve, and it would tend to push yields further up the yield curve.
The exact timing and the pace of those are policy decisions that we’ll take, but I think the clear message from last week is that’s coming sooner than later, certainly sooner than we had previously expected. Before we put that in place, we will provide more information on how we would operate in that environment.
The Chair: I’m going to follow up with Senator Woo’s question at this point because it was on topic. He was basically asking why you’re not taking that debt off more immediately, that you’re waiting for the next interest rate hike, which everybody is assuming is March. Is there a reason for that?
Mr. Macklem: As I indicated, our primary monetary policy tool is our interest rate. So it makes sense to start with that. The message last week is once we’ve done that in fairly short order, we will be considering supplementing that with quantitative easing. The simple reason is that the interest rate is the primary instrument, and that’s the place to start.
Senator Marshall: Thank you very much, governor, for being here today.
I wanted to talk about inflation because it is a big concern, especially to consumers. You said in your opening remarks that you were forecasting 3% by the end of the year and 2% in 2023. In the spring when you were talking about inflation, you were using the term “transitory.” Then you sort of started stepping back when the realization hit that it wasn’t going to be transitory and it was going to be a little bit longer. There were people in the Senate who actually thought it wasn’t transitory, even though we may not be economists. So it’s no longer transitory.
How confident are you with your projections of 3% and 2%, given the issue with regard to the term “transitory” in the spring? I felt you missed a mark with regard to the transitory inflation, and I have seen articles questioning the credibility of the Bank of Canada, and that is something that we really don’t need. We can question governments and the credibility of governments, but we don’t want to do it with the Bank of Canada.
What will the bank do to restore or close that credibility gap? I think it is a very important issue.
Mr. Macklem: The best way to convince Canadians that inflation is going to come back to the 2% target is to get it back to the 2% target. Fundamentally, we’re going to use our tools to bring inflation back to target.
One of the advantages of putting out a clear forecast is people can decide what adjectives they want to use to describe it. I’m not going to put a new adjective on it, but we’ve indicated clearly that, yes, we do expect inflation is going to remain uncomfortably high in the first half of this year before coming down fairly quickly in the second half as the pandemic recedes and things normalize.
There is obviously uncertainty around that. These supply chain problems and bottlenecks have been more pervasive and longer-lasting than we expected, and that is an important reason why we revised our forecast.
There is some uncertainty about exactly how long it’s going to take to work through the bottleneck and backlogs and for those to come down. As I indicated in the previous question, inflation could come down faster, particularly if there are some price reversals in our forecast. We have the upward pressure on goods prices diminishing so they stop rising at this unusual rate, but they don’t actually come back down. If they were to come back down, inflation would come back faster. That is balanced against the risk that some supply chain issues could be longer-lasting.
The virus is still out there. It is possible that Omicron affects production facilities in other parts of the world. So there is certainly still some uncertainty.
What I do want to underline, though, is that we will be and we are working to manage that uncertainty. We have signalled very clearly that interest rates are on a rising path. That is needed to bring inflation back. How quickly and how much we raise interest rates will depend on investments and what it’s going to take to bring inflation back to target. It’s very clear that interest rates need to go up. And the slope — how far they go up — will depend on developments, with the aim of bringing inflation back to target. I think getting inflation back to target is the best thing we can do to demonstrate that we are serious.
Senator Marshall: Thank you. Put me down for second round, if we have one, Madam Chair.
The Chair: Yes, I absolutely will.
Senator Ringuette: Thank you and welcome, governor. I think it’s your first time in front of this committee since your nomination to the governorship.
I read your report of last week, and I find you’re very optimistic in regard to 4% growth. I look at that and try to put all the different factors of the puzzle together.
The data that you have in your report, for instance, is that you foresee we will increase our exports by roughly 2.6% in growth and that we will be reducing our imports, which is intuitively not in accordance with the statement that consumer savings will be spent in the next year. That’s the first question.
My other question is related to Senator Massicotte’s and it is regarding business investment. You stated that businesses have invested in digital business.
[Translation]
They invested in digital because everyone else did. It was an essential element, not a strategic or productivity element.
You know, I always ask this question whenever we have the Governor of the Bank of Canada, because I am always very surprised that Canadian companies have huge reserves and are not investing in technological development, in robotics or in the productivity of their business. It is understandable that there are geopolitical factors, but in the past two years, these factors have only become more important in decision-making.
[English]
So I find you very optimistic, and good for you. In your business outlook survey, almost 50% indicate that they want to make investment. It would be interesting to know what is the aggregate of that business sector? Is it from the retail side? Is it from the manufacturing side? Is it from the food processing side? What’s the aggregate of this survey?
Mr. Macklem: Thank you, senator. I’m going to ask Senior Deputy Governor Carolyn Rogers to speak about our projection and I will come back to this issue of productivity and investment.
Just to dispel one point of confusion, in our tables where we have in the Monetary Policy Report where you see the negative sign on imports, that simply reflects the fact that imports subtract from GDP. Imports are growing, but imports, of course, reduce GDP, they don’t contribute to it. So it’s just the way we’ve reported it in the table.
But let me ask Senior Deputy Governor Rogers to say a few words about what underpins the growth projections and I’ll come back to you to speak more about investment and productivity.
Carolyn Rogers, Senior Deputy Governor, Bank of Canada: Thank you for the question.
It would be my preference to speak to you in French today, but that is on my list of things that I need to improve in my new role at the Bank of Canada. It is certainly my intention to do that. I’ll be back to visit you many times in my tenure and I hope in that period of time that I will be able to speak with you in both official languages. For today, let me just respond to you in English.
Where does our confidence come from? In your question you talked about the role of exports, and certainly we’re seeing the strength of the U.S. economy. As our biggest trading partner, that plays a big role in the growth that we see for the Canadian economy.
Also, as the governor has described, we also see excess capacity. There are a lot of things dragging on businesses and on the economy right now that we will see lifting as the pandemic lifts. So it’s apparent, if you go into a business right now, whether you go into a restaurant or a store, you will see that there are things that are restricting productivity, whether it’s the greeter at the store or restaurant that checks your vaccination passport or the number of people that are there helping with cleaning and that type of thing. As those things resolve themselves, as the pandemic recedes, we think there is an opportunity for excess capacity. As we said both in our Monetary Policy Report and in our discussion today, there is a high level of consumer demand. We do see that consumer demand rebalancing itself between goods and services. On balance, we see that demand remaining strong. That will also feed our growth.
We do think there’s lots of potential in the economy, and that potential will continue to reveal itself as the pandemic recedes. Those are the things that are contributing to our confidence in growth going forward.
[Translation]
Mr. Macklem: Coming back to productivity and investments, I completely agree they are essential to our standard of living. We are a central bank that targets inflation. Productivity and investment are essential for the country to see solid growth and a reduction in inflation.
As the Senior Deputy Governor just pointed out, during the pandemic, especially the second half of last year, we saw strong growth tied to the increase in jobs. We saw considerable gains in employment. That wasn’t really driven by productivity, but, as Ms. Rogers mentioned, it’s not surprising that productivity is down. Operational challenges are being felt: Employers need more workers and more space, and bottlenecks and supply chain issues are making it hard for them to plan. All of those factors have reduced productivity. We believe productivity will go up once those issues are resolved.
According to our forecasts, we will see more GDP growth than job growth. The labour market is experiencing a tightening. Businesses have an opportunity to hire workers from communities that are under-represented in the economy. Senator Bellemare mentioned the importance of an inclusive recovery. This is an opportunity to make the economy more inclusive going forward. However, labour is limited, so more growth will have to come from productivity.
The other factor is that we need business investment, as you mentioned. We are seeing strength in investment intentions, but it takes time to put the investment and capital in place. Business investment is absolutely critical to maintain productivity growth in the medium term.
I want to be very clear. Without that productivity growth, it will be necessary to further raise interest rates to reduce increased household spending and growing demand in the economy.
We will be keeping a very close eye on the situation. We believe our forecasts are balanced. Risks exist on both sides, and we could see productivity rebound more strongly than expected. We would all be very pleased if that happened, but we think our forecasts are balanced.
[English]
The Chair: I am going to interject at this point. We are more than halfway through our meeting, and we are still going through the first list of senators who have questions. I would again ask everyone to be as disciplined as they can be in both asking and answering questions.
My apologies, Senator Gignac. You should have been asked earlier, but we will give the floor to you now.
[Translation]
Senator Gignac: Good afternoon, governor, and thank you for being here. I’m extremely pleased to have the opportunity to speak with you once again as an economist, but also as a newly appointed senator, here in this forum.
Before I get to my first question, I want to commend you and your team on your leadership and hard work since the pandemic began. Thanks to strong action, financial markets fared well and continued to function, as did the Canadian economy, which returned to pre-pandemic levels last month, as you mentioned.
I want to piggyback on the discussion you had with Senator Marshall. You said that inflation should come down from roughly 5%, falling to 3% by the end of the year. You expect an improvement on the supply chain front, and then you’re targeting an inflation rate of 2%.
What would happen if the restrictions on supply — whether it be supply chain issues or the labour market mismatch — lasted longer than expected? Would that make inflation more resilient, sitting at an even higher rate for an even lengthier period of time?
Should Canadians get used to living with higher interest rates, perhaps even a policy rate that is above the neutral rate? With the restrictions on supply, will Canadians have to live with a higher inflation rate for longer than expected?
Mr. Macklem: I want to start by saying that, if your scenario were to transpire, yes, things would be tougher.
I also want to point out that the Bank of Canada’s Governing Council is committed to ensuring that short- and medium-term inflation expectations remain well anchored in terms of our target.
Currently, with the inflation increase, we expect the rate to stay at around 5% for the second half of the year.
Short-term inflation expectations have gone up. That’s clear from both our consumer expectations and business outlook surveys. As you can understand, we can use performance indicators to measure inflation expectations.
All of these indicators clearly show that, in the short term, expectations for inflation have gone up and are more or less in line with our forecasts. What we want to make sure of is that these increases in short-term inflation expectations don’t start impacting medium- and long-term expectations. If that happened, it would mean more lasting inflation and make it much harder to bring down the inflation rate to achieve our desired target.
We indicated quite clearly that interest rates would take a rising path for two reasons.
First, the output gap has closed, and with demand outpacing supply, it will be necessary to reduce the growth in demand vis-à-vis supply.
Second, we need to keep inflation expectations well anchored. If they aren’t well anchored, it will be a whole lot more difficult to reduce the costs associated with a higher inflation rate.
We are watching all of that closely, but we aren’t just watching. We are managing those risks, and the decisions we made last week mark a significant shift in monetary policy. We will continue adjusting monetary policy to manage these risks.
Senator Gignac: Thank you.
[English]
Senator Smith: Thank you, governor, for being with us today. We know the bank is tasked with the difficult job of ensuring that the cost of living comes down, but also working to prevent drastic fluctuations in asset prices. We know that asset prices affect both household behaviour and the economy as a whole.
Could you please talk about how the bank is working to manage these expectations and counter the looming housing market bubble in a way that does not cause drastic fluctuations in price?
Mr. Macklem: As you suggested, a homeowner’s biggest asset is their house. There are also many Canadians who would like to get into the housing market, and that is proving difficult.
I’m going to turn to Senior Deputy Governor Rogers to say a few words about our outlook for housing and also the risks around that.
Ms. Rogers: Thank you, senator, for the question.
I know that the price of housing is a problem on the minds of people trying to get into the housing market for the first time. It has been a persistent problem in Canada. It is on everyone’s mind and it is certainly something the bank has talked about before. Even well before the pandemic, the bank commented a number of times in its financial stability report about imbalances in the housing market.
The best way to understand our perspective here is to step back and look. We see the things affecting the housing market and the price of housing in two categories, one being more cyclical. Certainly, interest rates play a role there. There’s no question that a period of long low interest rates has had an effect on the price of housing.
However, more recently, like many things we’ve seen, shifts related quite a lot to the pandemic. So we’ve all been living, working, even spending our leisure time in our homes largely for the last two years, and of course that has led to a shift in housing preference for many Canadians. A lot of us have been looking for additional space. That has led to a large amount of what we call the resale market — people who own homes already looking for larger different homes. So that has certainly elevated housing activity.
That’s sort of a dynamic — like many things with the pandemic — that the governor has been talking about, and it is something we see receding over time, at the same pace as the pandemic itself recedes.
Then, very importantly, we look at the structural or the more persistent effects on housing imbalances. It is certainly the bank’s view that the most important problem we can solve in the housing imbalance is supply. We just don’t have a level of supply of housing in Canada that’s keeping pace with demand. We haven’t had it for quite some time. I know there are a number of efforts on this front at the federal, provincial and municipal level. The bank is very supportive, very glad to see these happening and we hope they continue. So ultimately we do think the housing imbalance will be solved primarily by an increase in supply.
Senator Smith: Can I ask you a question?
Ms. Rogers: Go ahead.
Senator Smith: My concern is that if we have interest rates, easy money, at 1.8% and you have a five-year fixed mortgage and you have a small mortgage of, say, $50,000 at $207 a per month, it’s not really an issue for most people. However, suddenly if the interest rate goes from 1.8% to 3% or 3.5% and doubles and you’re a young person with a $250,000 mortgage, I don’t see how things will fall back into some perspective other than you’ll have a lot of repossessions and another new dynamic in the housing market. I’m just trying to understand.
In trying to maintain and keep rates lower, making sure inflation comes back to its limit, is it a realistic expectation to be able to manage it in maybe the traditional way housing has been managed to this point, understanding that it’s not going to be the Government of Canada or municipal governments that build the houses? It’s going to be entrepreneurs and people who have opportunity because land is available for them to build. I’m trying to understand the dynamics.
Ms. Rogers: Certainly one thing I would refer to is a measure that OSFI brought into place — this came into place in my previous role at OSFI — which is the minimum qualifying rate for mortgages.
Senator Smith: The stress test, right?
Ms. Rogers: The stress test, yes, and the stress test is designed to get to that issue that you just talked about. It is to ensure that people who are borrowing now in an extremely low-rate environment can still sustain their payment over a period of time when rates are increasing. There is a floor of 5.25%, and that is the test that borrowers are asked to pass. There is a lot of room between where we are now and 5.25%, so that gives us some buffer that we think will help with the problem you’ve identified.
The other thing that gives us some comfort is the build-up of savings that we mentioned earlier. Over the course of the last two years, households have built up their balance sheet. We have seen household debt come down, but certainly high house prices do mean that borrowers have to stretch, their mortgages are larger. That is a vulnerability overall in the economy and one we will keep our eye on, but we do think there are some mitigating factors there.
Senator Smith: Thank you very much.
Senator Yussuff: Thank you, governor and deputy governor, for taking the time to join us today.
There is a great deal of obsession with the level of inflation, and rightfully so. I think most Canadians would like to see inflation come down. I did have a chance to read most of the background documents the bank had provided. I think I’m fairly satisfied that the policy objective over the short and long term will get us where we need to get to.
One of the questions I have, governors, is that the bank mandate throughout history has always been about inflation. Finally, the bank has some additional recommendations in regard to this mandate in trying to build a more sustainable and equal economy. Maybe you can shed some light on how the bank will devote an equal amount of effort to try to figure out how to do that.
As you know, for more than three decades or so, a certain segment of the economy did not fare very well dealing with stagnant wages, and to a large extent, we have seen the growth of precarious sectors in this country. Given your new mandate, how do you and the bank plan to utilize these new tools to help build a more inclusive economy in this country and to give Canadian workers a sense that their lives are equally important as those in business in this country?
Mr. Macklem: I wanted to congratulate you, Senator Yussuff. I think this is the first time we’ve had a chance to interact in this role. Congratulations on your appointment.
With respect to our mandate, I would highlight a few things. I think the two key words to describe it are continuity and clarity. There is continuity. The renewed mandate makes very clear that our primary objective remains price stability. The target remains 2%.
The agreement also clarifies the important role that the Bank of Canada has in trying to achieve maximum sustainable employment. It recognizes that maximum sustainable employment is not directly observable; it’s not even measurable, but it does recognize that employment plays an important role in our decisions.
The other thing is that it adds clarity around the flexibility that is built into our flexible inflation-targeting regime and some of the circumstances where we intend to use that flexibility and where it can be particularly helpful.
I think that you could see in the decision that we took last week, and in the material that we put out, the attention we’ve been putting to labour markets, and that isn’t really something that started last week. You’ve seen this all through the crisis, all through this pandemic. And we’ve talked previously about this, the very unequal effects the pandemic has had across the labour market, the fact that it has particularly disproportionately affected low-income workers. As I highlighted in one of my previous answers, the good news is as we saw strong job gains, particularly through the second half of last year, they were concentrated in the hardest-hit sectors. So that inequality, that unevenness we’ve seen is substantially diminished.
If you’re in hospitality, if you’re in arts and entertainment, I’m sure you don’t feel like the economy has recovered. As the Bank of Canada, we need to look at the economy overall, and overall it is our judgment that the labour market has recovered. If you look at the macro statistics, the employment rate, the unemployment rate, the participation rates, they’re back or very close to pre-pandemic levels. These measures of unevenness have substantially diminished.
If you look at the broad range of the labour market indicators we provided, there are still some areas where we would hope to see some continued improvement. Long-term unemployment is still too high. That reflects the fact that certain sectors have been disproportionately hit, and those sectors remain weak, so some of the people in those sectors have been unemployed for far too long.
In terms of other areas, low-wage workers have come back, but they are still not back to pre-pandemic levels. There is potential there. For the other group, older workers — and I say this with some trepidation, looking at how old we all are, because I think most of us are in the 55-plus category — their employment has not come back to pre-pandemic levels. Now, part of that is actually just the aging of society. The average age of the 55-plus now is higher than it was pre-pandemic. It’s not surprising that, as people get older, the labour market participation rate goes down.
We’re going to have to dig a bit deeper on this: Did the pandemic accelerate some people’s retirement or have people lost their jobs involuntarily? There is more work to do to get to the bottom of that.
In our projection, we still have solid growth: 4% for this year, 3.5% for next year. That should provide an opportunity. Particularly as the pandemic recedes, these hardest-hit sectors should bounce back. We are expecting in our own projection to see strong growth, particularly in services consumption, and that should help improve the employment in some of these hardest-hit sectors.
At the end of the day, monetary policy is an aggregate tool. It is a very macro instrument. We can’t target specific groups. There are other policy instruments, particularly fiscal policy, that can be more targeted in helping specific groups.
The other thing I would emphasize is that, going forward, whether it’s the housing market or the labour market, policies need to be focused on bringing supply into the labour market. For example, the government’s plan to improve access and reduce the cost of daycare is a good example of a policy that can help improve the labour market participation of parents, particularly mothers, and grow the labour force, grow the economy, create more space for Canada to grow, and improve the incomes and welfare of Canadians.
So whether it’s the housing market or the labour market, in general, the policies that add supply and help people to help themselves will be critical to sustaining this growth.
The Chair: There is a follow-up question from Senator Woo on this. You’ve just stated that you cannot directly observe maximum sustainable employment, so how will you know — and how will we know that you know — that you’ve achieved it?
Mr. Macklem: Let me say a word about the work we are doing on this. In our report last week, we went out of our way to highlight the wide range of labour market indicators we’re following. In addition to what we put out last week, there is a longer staff analytical paper that goes through this in more detail.
Right now we’re assessing the labour market today relative to where it was pre-pandemic. That makes sense. It’s an obvious benchmark. As we move forward, that benchmark will become more of a piece of history. The labour market is dynamic. There are forces of aging. There are big forces on the economy: new technology, digitalization. Climate change is also going to have very different sectoral impacts across the economy, on a scale that will have aggregate consequences. We will have ongoing work to do to assess the relevant benchmarks as we look at this broad set of labour market indicators, and there may well be other indicators we need to look at as well. That work has already started and you will see that in the coming months.
We’re not going to be able to put a number on maximum sustainable employment. We will look at a broad range of labour indicators, including things like wages as well as measures of how many people are working across different age and gender cohorts. We’re not going to be able to put a number on it, but you can get an assessment of the overall tightness of the labour market and how much unused capacity there is in the labour market. Obviously, if the labour market gets too tight, that starts to become inflationary and that will be a signal to us that we’re there.
Senator Quinn: Good afternoon, governor and deputy governor. Thank you for joining us this afternoon. This has been very interesting. The information provided in advance, along with the questions and responses, have caused me to change my questions over the last little bit.
You have touched on some of the things I was interested in hearing a bit more about, such as the aging workforce, increasing retirements and things of that nature.
Over the last few weeks, I’ve talked to different groups in different sectors. There is a recurring theme that becomes more and more troublesome the more groups I speak to. Yes, the retirements are there and there is a lack of people to move into these roles. Even more concerning is that in the pipe, we’re not getting the numbers of young Canadians to study in areas that will position them to move into critical areas, transportation being one of them. There is a chronic, looming issue — with rail, road, marine in particular — of a lack of people to assume those roles in order to move our goods that are being produced into the various marketplaces, whether domestic or in the export market.
Is the bank’s analytical community looking at these factors? It’s not so much the vacancies, but who is coming in and who are we training to move into those jobs? Thank you.
Mr. Macklem: What you see in the economy right now is a strong demand for workers with digital skills. If you look at employment for people with digital skills, it is well above pre-pandemic levels. Even with that strength in hiring, there are a lot of vacancies. That will probably continue. This pandemic has accelerated the digital economy. I don’t think we’re rolling back.
That does put a premium on training and education. Our universities and colleges need to respond. Before I was governor, I was dean of the Rotman School of Management. I know that at U of T and a number of other leading institutions in Canada, there was an increasing effort to expand those programs. More broadly, I think colleges and universities have to build digital skills across every program, not simply engineering, math and statistics. Digital skills are going to become a core work skill that everybody needs.
Companies also have a responsibility and opportunity to train their workers. New digital platforms are making it much easier to train people and reach more people within companies. Those kinds of investments will be key to realizing some of the productivity gains we talked about earlier.
The other area where we’re seeing a lot of shortages — and this goes back to pre-pandemic — is in skilled trades. Right now there are critical shortages in transportation. I know that you know a lot about ports. Our ports need people and improved logistics. The B.C. floods, for example, have further disrupted our transportation routes, and getting that stuff fixed will be extremely important.
There is an acute need right now to try to improve the flow of goods in Canada and globally. Anything that can be done at different levels of government to help with that will be helpful so people can buy the goods they want and companies can get the goods they want to invest in. There is some mismatch in the demand for labour with the skills. As a country, we need to work to try to reduce that mismatch.
The other piece of the puzzle is immigration. Obviously, through the pandemic, bringing in immigrants has been very difficult. There remains a backlog with bringing in immigrants, but we are pleased to see that immigration is rebounding. It’s going to be important to make sure we have an efficient, effective immigration system to help bring in the skills and the people we need to grow this country.
The Chair: Thank you very much, governor.
I would like to ask a question as we wrap up this first section. We’re quickly running out of time.
As we’ve heard you speak today and basically since your appointment, you’re much more vocal on a whole range of social policy issues: the importance of women in the workforce, environmental policy, housing needs, the workforce, the nature of the workforce and how it should be shaped. Is this a new role that you’re trying to define for the governor, that they must tie their activities to some of the realities that the public is seeing? Some people call it “mission creep.” You may have another way to describe it.
Mr. Macklem: I do have another way to describe it.
First of all, I would emphasize that everything we study, everything we talk about is anchored in our mandate. We need to understand what’s going on in the economy. And I think this pandemic has really illustrated that the effects of the pandemic have been very uneven across different sectors. You can’t understand the macroeconomy without looking under the hood and digging deeper and looking at the impact on different sectors and different workers.
When you look ahead, climate change is going to be the defining challenge of the future. It’s going to affect every sector of the economy, but it will not affect them equally. It will have very different effects. That will be on a scale where it will have macroeconomic consequences. So we are going to have to look under the hood and understand.
That is an important reason why we have been looking at things on a more granular level. We need to do that to be effective and to deliver for Canadians and do our job.
The other thing I would highlight is that we are spending more time trying to listen to Canadians. We’ve renewed our mandate now a number of times and we’ve regularly talked to experts and to markets. This time, we made a concerted effort to talk to Canadians. We ran a cross-country survey, Let’s Talk Inflation. We had a series of focus groups. That was very informative. We learned a lot about how people experience inflation. One thing I really took away from that is inflation was running at about 1% when we did this. Nevertheless, we heard very clearly from Canadians that they do not like inflation. Inflation makes it harder for them to pay their bills. It makes it harder for them to plan. They want low, stable inflation.
Getting back to Senator Bellemare’s question, the other thing that came through was while some wanted a dual mandate and some didn’t, and there was quite a bit of diversity on that subject, overall there was a sense that people wanted jobs. They wanted employment to be part of the monetary policy conversation, and I think that is reflected in our new mandate.
When we look to the future, what are some of the other big issues that will touch every Canadian? We’re planning for the possibility of a central bank digital currency. A digital currency will be something that every Canadian interacts with. So we’ve got experts working on the technology. One of the things you’re going to see this year is us reaching out more directly to talk to Canadians. What do they expect in a digital currency? What are their aspirations? How would they use it? What are their concerns?
We come to work every day in the service of Canadians, and understanding Canadians’ perceptions, aspirations, their level of confidence in the bank, their concerns, that is important for us to be successful in our role.
So yes, we are more out there than you’ve seen in the past, and that is something that will continue, but I would underline that we’re doing this in the service and in the pursuit of our mandates.
The Chair: We are rapidly running out of time here, and I want to give my colleagues more of an opportunity to speak. I’m going to ask you to keep your questions very brief — no long introductory remarks — and I will ask the governor to keep his answers brief as well because we have about 20 minutes to go, and I have five or six questioners still waiting.
[Translation]
Senator Bellemare: I want to follow up on what you just said, Mr. Macklem. More and more, the Bank of Canada is taking a granular look at things. I realize the Bank of Canada is not a political institution, but are you in regular contact with the Department of Finance when it comes to coordinating shared objectives in a consistent manner? As you said, the effectiveness of monetary policy depends on policies at the microeconomic level.
When you raise interest rates and tighten monetary policy, should we be concerned about foreign debt? Will foreign markets hold our debt? Do you have any concerns on that front?
Mr. Macklem: To answer your first question, I would say that the Bank of Canada and the Department of Finance have discussions on a number of levels. Yes, we share our projections, economic information and surveys with the people at the Department of Finance. In accordance with legislation, the minister and the governor… I’m not sure of the French wording in the legislation, but I believe in English, it says —
[English]
It says that the governor and the Minister of Finance should speak periodically on a regular business. I can assure you that does happen. We do share our perspectives and that is helpful for both of us in the pursuit of our respective mandates.
[Translation]
Your second question pertains to public debt. Canada’s debt rose significantly during the pandemic for a very good reason. The good news is that, despite this sharp increase, in comparison with other G7 countries, the level of debt is still fairly low. A large part of that debt is financed over the long term, so yes, a higher interest rate would affect the level of debt. However, it would not change the cost of that long-term debt.
It would take a while before higher interest rates had an impact. Yes, households, businesses and the government would be affected. Yes, there would be an impact, but no, we aren’t concerned it would result in an economic crisis.
Senator Bellemare: Thank you.
[English]
Senator Loffreda: Thank you, once again, to the governor and the deputy governor. I would like to get your comments on the size of the Government of Canada debt that the Bank of Canada is currently holding. When I look at Finance Canada’s The Fiscal Monitor, I see the government has sold roughly $1 trillion in bonds up until the end of November. That’s the most recent The Fiscal Monitor, released last Friday, January 28. In my understanding, it is currently at 43%, which is down from the 46% reported in October in the Monetary Policy Report.
If the bank continues with its reinvestment phase, what impact will this have on the number of bonds being held by the bank? Would you continue to own roughly the same amount? Is there a link? And is this not a concern?
Mr. Macklem: This is getting a bit hypothetical. We’ve indicated that once we increase interest rates, we will consider exiting the reinvestment phase and allowing bonds to roll off our balance sheet. But with that important caveat, as you indicated, the holdings by the Bank of Canada of Government of Canada debt peaked at about 46% of the outstanding stock of government debt. As we’ve entered the reinvestment phase, basically the issuance is higher than our purchases. Our purchases are much lower now. So that share has started to fall. It fell from 46% to 43%.
Now, exactly how fast it falls would depend on how much the government issues, but you’ve seen over several months it has fallen from 46% to 43%. So if we were to stay in the reinvestment phase, it would continue to fall gradually. If we moved to allowing government bonds to roll off — in other words, we don’t purchase new bonds to replace the ones that roll off — the share will start to go down more quickly.
Senator Loffreda: Is it a concern?
Mr. Macklem: No, it’s not a concern. I think the time for quantitative easing, together with exceptional forward guidance, proved to be very effective policy tools to support the economy through the recovery. The economy has now recovered. We don’t need emergency levels of monetary policy. We have moved off emergency levels. We’ve indicated that interest rates will be on a rising path, and we’ve indicated that we will be considering a quantitative tightening once we raise our policy rate.
The message is that the economy is growing strongly. Interest rates are at all-time ultra lows. Our balance sheet is bigger than it has ever been. It’s time to start normalizing that. We don’t need these exceptional policies going forward.
Senator Loffreda: Thank you.
Senator Marshall: I noticed the Minister of Finance tabled the Public Accounts just before Christmas, and there was a note there that referenced the $19-billion loss relating to Government of Canada bond purchases by the Bank of Canada. I couldn’t understand the note and had to contact the auditors to get an explanation.
When you say now you’re not going to aggressively clean off your balance sheet, you’re just going to let the $433 billion, you’re saying at this point you’re just going to let it mature. Are you doing that because if interest rates are going to rise, by just letting the $433 billion roll off as they mature, does that avoid or diminish the possibility of future losses similar to the $19 billion that’s reported in the Public Accounts?
Mr. Macklem: Let me be very clear on this point. We do not run monetary policy to maximize the revenue or minimize the losses. We run monetary policy to pursue our mandate, which is to control inflation. That is really why you have an independent central bank: so that it can pursue its mandated policy objective.
Over time, monetary policy — the Bank of Canada is very profitable. If you have a monopoly on printing physical banknotes, you print those at very minor cost. And then the other element you hold on your balance sheet is Government of Canada bonds. This is normal course. This is not QE. This is just normal course. You earn interest on those bonds. Those profits are regularly remitted to the government. But we don’t run the Bank of Canada to maximize those profits. We run it to achieve our mandate.
Senator Marshall: Okay. But the question —
Mr. Macklem: I will get to the other point. But that was a very important point to start with.
You are correct that right now on our balance sheet you can see — it’s reported every month — there is an indemnity. So on the bonds that we hold, there are mark-to-market gains or losses depending on what interest rates do. Because we bought these bonds at the depths of the crisis when interest rates were across the curve extremely low, the economy is now recovering — that’s a good thing — longer-term bond rates have gone up; there is a mark-to-market loss on our balance sheet.
When we embarked on quantitative easing, we knew there was that possibility. The Government of Canada Department of Finance indemnified the Bank of Canada for those. The value of that indemnity appears on our balance sheet. I think it’s about $7 billion right now. It fluctuates with movements in interest rates. The value of it will also change — coming back to Senator Loffreda’s comment — with the size of our balance sheet. We start to let things roll off; that will affect it as well.
If we were to actively sell bonds on our balance sheet, any losses or gains would be realized. If we don’t sell them, if we simply hold them to maturity, those gains or losses would not crystallize.
Senator Marshall: I understand. Thank you.
The Chair: Thank you very much.
Senator Massicotte: Governor, I want to talk very quickly about the real estate market. You expect with your monetary policy that it will stabilize, which means what? I know from a market sense because of NIMBY and municipalities, I’m still convinced there is going to be a shortage of supply. What is the objective you’re trying to achieve? Are you trying to erase the 30% increase in housing prices over the last 12 months? In other words, that would not be very popular. I suppose a few parliamentarians would agree with that. But if you want to get back to removing the inflationary impact, that’s what one should do.
When you say “housing markets to stabilize,” what is the objective? What is it you hope to see relative to the prices?
Mr. Macklem: We run monetary policy for the whole economy. We don’t have a specific objective for the housing sector. Obviously, you don’t want to create financial instability, but our objective is to bring inflation back to target in a way that sustains solid growth along that path. The housing sector is part of the economy, but it’s certainly not the whole economy.
Let me turn to Senior Deputy Governor Rogers to say a few more words about our housing outlook.
Ms. Rogers: Yes, I was going to say the same thing the governor did. We don’t have an objective in terms of the price of housing. That is not something we target. We target inflation.
Maybe what you were referring to, senator, was that in our Monetary Policy Report, we talk about what we see the housing market doing over the near term. And that comes back to some of the dynamics that I spoke about in the previous question where we see some of the effects of the shift in Canadians’ preferences for housing subsiding as the pandemic subsides. Certainly, an upward path for interest rates will have some moderating effect on demand.
We do think the elevated levels of housing activity that we see right now will gradually come down as activity comes down. That’s one of the pressures you see on prices. So we will see some moderation, but to be very clear, as the governor said, we don’t have an objective or a target in mind for the housing market. That’s not the business we’re in.
Senator Massicotte: Thank you.
[Translation]
Senator Gignac: This is more of an academic question. In previous cycles, a monetary policy shift was said to have a time lag of 9 to 15 months. In other words, it took that long for the full economic effects to be felt. Given that the majority of Canadians opted for variable rate mortgages during the pandemic and given what you see on your balance sheet, is that still true? What is the rule of thumb? In light of that monetary policy lag, should the Bank of Canada go beyond the neutral rate to bring inflation down to 2%, or should it respond more quickly?
Mr. Macklem: As you know, Senator Gignac, thanks to Milton Friedman, we have a popular saying in economics:
[English]
Monetary policy has long and variable lags.
[Translation]
There are two sides to the coin. On one hand, yes, Canadians have a high level of debt. We have long held that this is a vulnerability. Given the high level of debt, we could see a stronger impact when interest rates go up. On the other hand, one of the unique things about this pandemic is that the savings rate has gone up significantly, which means households have accumulated a lot more in savings. The average household is better off. It’s important to keep in mind that the situation is mixed: Some families bought a home, pushing their financial boundaries and taking on more debt. Other families, however, saved a lot of money during the pandemic. The situation is mixed, so it’s tough to say how significant the impact of a rise in interest rates will be. We’ll be keeping a close eye on things. We have signalled very clearly that interest rates are on a rising path.
We will make decisions at every meeting, indicating that interest rates are on a rising path. That likely means a series of increases, not just a single increase. After a certain amount of time, we’ll be able to take a step back and see just what the impact has been.
Those decisions will depend on economic development and, above all, what happens with inflation, as well as our inflation forecasts. When or if we decide to take a step back, what exactly that rising path looks like will depend on development. We will keep a close eye on the impact of interest rate increases and we’ll be able to make adjustments.
Senator Gignac: Thank you.
[English]
Senator Yussuff: Governor, as you’re aware, our productivity gains over the last two decades have not exactly been stellar. It’s a similar situation if you look at the OECD data in terms of investment in training and machinery and equipment, despite strong indications by various finance ministers. Given the nature of the recovery and the desire to do better going forward, does the bank have any desire to communicate to businesses, as they look at their investments, how we can better invest to obviously encourage higher productivity gain? At the same time, we are recognizing that we have an aging workforce. We need to renew the skill levels among our young people in the diverse population. This is an area that is lacking clarity from the government. Is the bank planning to encourage businesses to start taking this more seriously?
Mr. Macklem: I am speaking to the Canadian Chamber of Commerce next week, and, yes, I will be giving them some encouragement. That is the short answer.
As we come through this recovery from this pandemic, we are getting back to addressing some of the perennial issues that we have faced for some time. And I think it is a legitimate question: What has changed? Or what could change?
I do think that as we come out of this pandemic, there is an opportunity for that to change. We’ve all had to live with a lot more change through this pandemic. Workers have had to live with more change. Businesses have had to be much more nimble than they were in the past. They could not stand still. They had to change their businesses. They had to figure out how to deliver to customers. They had to figure out how they were going to make it safe or have their workers work remotely.
I do believe there is an opportunity, and it is going to be important that we seize it. Ultimately, our standard of living is directly linked to productivity. As I said earlier, there is an inflation target in the central bank; we’re going to bring inflation back to target. The more productivity growth we get, the more people we can draw into the labour force, the more productive our workers are by being better educated and better trained, the bigger this economy can be, the more inclusive it can be, the more productive it can be and the better our standards of living will be.
Yes, this is a shared responsibility. Canadians count on the Bank of Canada to deliver low, stable inflation. They count on businesses to invest in capital and people. They count on governments to create a healthy investment environment. They count on governments to support education, to help people have the capacity to work. It’s going to take all of us together to realize this ambition.
The Chair: Thank you very much for your comments, governor, and for all the questions from the members of the committee. We have covered an awful lot of turf today in our two hours. Just a more formal thank you to Governor Tiff Macklem and Senior Deputy Governor Rogers. Welcome and thank you for being here today. We look forward to more encounters. We have all these topics that you have raised on the list of things to do this session. We hope we will see you again.
Honourable senators, we are at the end of our meeting time. I just want to remind you that next week, we will have a longer in camera session to discuss next steps and the studies that will have priority. We even have some invitations out to some potential witnesses for a short session at the end of all of that, but we will be in touch if we have any answers.
Thanks again to all of you, to the governor, to the deputy governor and to all our staff for working under very difficult circumstances today. We hardly even heard any horns honking. Thanks so much. We’ll see you again next week.
(The committee adjourned.)