THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Wednesday, October 30, 2024
The Standing Senate Committee on Banking, Commerce and the Economy met this day at 4:15 p.m. [ET] to study matters relating to banking, trade and commerce generally; and examine and report on Canada’s monetary policy framework.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello to everyone here, 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 would like to introduce the members of the committee: Senator Loffreda, our deputy chair; Senator Fridhandler; Senator Gignac; Senator Martin; Senator Massicotte; Senator McNair; Senator Ringuette; and Senator Varone. And we have Senator Deacon visiting with us today. Senator Marshall was not on our list, but she is here and we are glad she is here.
The committee has a wide mandate to study matters relating to banking, trade and commerce generally.
We have several things on our plate, including eventually looking at the Bank of Canada mandate, which is under study.
Today, we want to begin our conversation on the most recent Monetary Policy Report and, of course, the rate cut which the governor has described as a good news story, and the country is coming out the other side of the inflation issue.
We have the pleasure of welcoming in person Tiff Macklem, Governor, Bank of Canada; and Carolyn Rogers, Senior Deputy Governor, Bank of Canada.
Mr. Macklem, I’m sure you have opening remarks, and we would like you to share them.
Tiff Macklem, Governor, Bank of Canada: I do; I won’t disappoint you.
Good afternoon. Ms. Rogers and I are very pleased to be here to discuss our Monetary Policy Report, our new economic outlook and, of course, our decision last week. Last week, we lowered our policy rate by 50 basis points. That was our fourth consecutive interest rate cut and brings our policy rate to 3.75%.
We took a bigger step last week because inflation is now back to the 2% target, and we want to keep it close to the target.
In the past few months, inflation has come down significantly.
Headline inflation was 1.6% in September, and both our measures of core inflation were under 2.5%. Price pressures are no longer broad-based. Our surveys also find that business and consumer expectations of inflation have shifted down and are nearing normal.
All this suggests we are back to low inflation.
As you highlighted, chair, this is good news for Canadians.
Now our focus is to maintain low, stable inflation. We need to stick the landing. That means the upward and downward forces on inflation need to balance out.
Economic activity picked up this year, but it is still soft. This softness has helped drive the remaining steam out of inflation, but with inflation now back at 2%, we want to see growth strengthen. Last week’s interest rate decision should contribute to a pickup in demand.
[Translation]
Looking ahead, we expect the economy to gradually strengthen in 2025 and 2026, supported by lower interest rates. Population growth will be slower, but we anticipate consumer spending per capita will be picking up. We also expect growth in residential investment to rise as strong demand for housing lifts sales and spending on renovations.
We expect business investment to strengthen as demand picks up, and exports should remain strong, supported by robust demand from the United States. Our forecast has inflation staying around the target over the projection horizon. The upward pressure from shelter and other services is expected to gradually diminish. With stronger demand, the downward pressure on inflation should also dissipate.
In addition, the upward and downward forces should remain roughly balanced. There are risks around our inflation outlook. The biggest downside risk to inflation is that it could take longer than anticipated for household spending and business investment to pick up.
In terms of upside risks, lower interest rates could fuel a stronger rebound in housing activity, or wage growth could remain high relative to productivity.
We are also facing elevated geopolitical uncertainty and the risk of new shocks. Overall, we view the risks around our inflation forecast as reasonably balanced.
[English]
If the economy evolves broadly in line with our forecast, we anticipate cutting our policy rate further to support demand and keep inflation on target. The timing and pace of further interest rate cuts will depend on incoming information and our assessment of its implications for the inflation outlook. We will take our monetary policy decisions one at a time.
Let me conclude.
High inflation and interest rates have been a heavy burden on Canadians. Now we are coming out the other side. Monetary policy has worked to bring inflation down. With inflation back to target and interest rates continuing to come down, families, businesses and communities should feel some relief.
The bank is committed to maintaining price stability for Canadians by keeping inflation close to the 2% target. With that, the senior deputy governor and I would be pleased to take your questions.
Thank you.
The Chair: Thank you very much. You are not going to tell us what you are going to do in December?
Mr. Macklem: I have tried to be clear on the direction, but in December, we’ll decide exactly what we are going to do in December.
Senator Loffreda: Thank you for being here with us. Thank you for your opening remarks; they are always insightful. You said you may anticipate further cuts. Are you concerned with the weakness of the Canadian dollar? We are a trading nation. The U.S. economy is showing strength. We don’t foresee any immediate cuts in interest rates in the U.S. economy. Are you not concerned that the weak Canadian dollar will lead to inflation? Three quarters of our exports are to the U.S. We have significant imports from the U.S. Is that not a concern?
Mr. Macklem: Senator, we have a flexible exchange rate. That’s what allows us to run monetary policy suited to Canadians. If we had a fixed exchange rate, we would have to do exactly what the U.S. does. Our economy is not as strong as the U.S. economy. We need lower interest rates in Canada than they have in the United States. We are lower at the short end. Actually, the whole yield curve in Canada is a good percentage point below the U.S. Given the softness in our economy, that is needed. We have excess supply in the economy. The labour market is softer in Canada than in the United States. We want to see growth pick up, so, yes, we have been lowering interest rates.
Part of the way monetary policy works is through the exchange rate. When we lower interest rates more than the United States, the Canadian dollar weakens, which adds stimulus and makes our exports more competitive. That’s part of the way monetary policy works.
There are limits to how much we can deviate from the United States in our interest rate path without starting to create some difficulties in the exchange market. However, we are not close to those limits. We have had bigger deviations in the past than we have now, and those are not factoring into our current monetary policy decisions.
Senator Loffreda: Related to this significant appreciation of the U.S. dollar over the past decade in comparison to the Canadian dollar, there is a shift in the gross domestic product, or GDP, per capita. If I look at the early 2000s, we were very close to being 9% higher than the Organisation for Economic Co-operation and Development, or OECD, average with respect to GDP per capita. Now we are below the OECD average. What are the factors driving this decline? Do you see any monetary policy that can reverse this trend, or is it strictly because of the significant appreciation of the U.S. dollar over the past decade that has contributed to this shift?
Mr. Macklem: I would see the exchange rate reacting more to the different economic performance rather than the economic performance reacting to the exchange rate. The U.S. economy has had stronger growth, and, importantly, it has had much stronger productivity growth than Canada. The U.S. has had much more investment than the Canadian economy. Their output per worker has been rising. Coming out of COVID-19, it has risen in Canada. It has actually been declining in most quarters. That has increased the productivity gap between our two countries. Yes, that is reflected in the exchange rate.
The U.S. economy really stands out among advanced economies in that the productivity of most advanced economies coming out of COVID-19 has disappointed us. As things returned to normal, supply chains normalized and companies were not holding extra inventory, so they could predict when things would arrive. They hired many workers coming out of COVID. Now they are fully trained up. We thought it would translate into more productivity growth. In Canada and most European countries, that has not happened. In the U.S., you are seeing a lot more dynamism, more investment and more new company creation. Part of that is structural. They have a much bigger tech sector. It is partly that their companies are also investing more in new technology.
The value of the U.S. dollar is reflecting the underlying strength and productivity in the U.S. rather than the reverse.
Senator Marshall: Thank you very much, governor and senior deputy governor, for being here. Can you talk a little bit about your Business Outlook Survey? I was looking at that, and it seems like there is some sign of optimism, but not a lot of optimism. Can you tell us what you are hearing from the business community? You did say twice in your opening remarks that business investment should strengthen. There are many factors that influence business investment. The interest rate is one, but there are many other things like taxation.
Can you talk about what you are hearing from the business community? Also, I would like to pick up on what Senator Loffreda was asking about the exchange rate. When I asked you this the last time you were here, I had seen the odd article about the value of the loonie depreciating. Now I’m seeing more articles. At what point do you look at it and say that it is a concern for the bank, or do you just let it slide? If it goes to 68 cents or 66 cents, that’s it; there is no reaction from the Bank of Canada.
Mr. Macklem: I’ll let the senior deputy governor start on the surveys. I thought your summary was good, actually.
Carolyn Rogers, Senior Deputy Governor, Bank of Canada: Optimism in the businesses that we are talking to has come off a low point. It is starting to trend back up. We would like to see it keep going. Regarding what is contributing, at a year and a half or at the peak of inflation when the economy was overheated, one of the things we heard businesses worry about was their input costs, but also labour. They couldn’t get the workers they needed. They were competing for labour, so the labour costs were going up. Even businesses that had a lot of demand couldn’t meet that demand necessarily.
Senator Marshall: Costs are high. We went through the inflationary period. There are other factors like productivity, which is the issue that you raised. There’s still an issue there, and it is not going to be solved. When I read what you said about the business outlook, I thought it was a little overly optimistic.
Ms. Rogers: I would not describe business optimism as high, but we have seen that it is coming off a lower point. It will take a while of inflation being back at target and rates coming down for it to feed through to optimism just like it fed through the opposite on the way up.
Senator Marshall: Do you think it will be a couple of years? Will it be 5 years or 10 years?
Ms. Rogers: It depends a lot on other things that are contributing to business sentiment. One of the other things we hear is policy certainty. There are geopolitical risks. Businesses are facing a lot. How long will it be before having the feeling of inflation being back at target and interest rates coming down? That’s generally a year or more and depends on what else happens, I think.
Mr. Macklem: You will probably see it faster in household spending. On bringing down the cost of credit, you will see it more quickly in the housing market. You will start to see it more in household demand.
Yes, businesses are affected by interest rates. It affects their costs of capital and their borrowing costs. They don’t invest unless they are sure that they can sell their product. If interest rates are coming down and they see demand picking up, that’s when you will start to see more investment.
Typically, the household is a bit faster, and businesses take a little longer. But I think the timeline of over the next year is reasonable.
The Chair: To Senator Marshall’s point, is there a value of the loonie that troubles you?
Mr. Macklem: We have an inflation target. We don’t have an exchange rate target. We believe in flexible exchange rates in this country. We have a very deep foreign exchange market. I think people need to remember that we have been through a period where, particularly if you are comparing Canada and the United States, we have been faced by similar shocks. We all faced COVID and a big increase in inflation coming out of COVID. We all dropped rates like a stone at the beginning, held them at emergency low levels and increased them rapidly. If we had been doing those things by ourselves, we would have normally seen some big changes in our exchange rate. But because the U.S. and Canada were on a similar track, the interest differential was small, so it didn’t have much effect on the exchange rate. Now you are starting to see more of a differential in economic performance between the two countries. We are gearing monetary policy to the needs of Canada. Some interest rate differential has shown up. The Canadian dollar is a little weaker.
To be honest, it hasn’t moved that much. It was 74 cents. It is now 72-something cents. We are not talking about big movements in the exchange rate.
The thing that does move the exchange rate much more than interest differentials is risk sentiment. If risk sentiment were to turn against Canada, or if there were a big flight to quality in the world which would cause a big flight to quality in the U.S., those would have bigger effects on exchange rates.
The Chair: Thank you for that.
[Translation]
Senator Gignac: My first question concerns monetary policy. Economists have stepped up the pace of rate cuts, and we commend you for your pragmatism. You also cut rates by 125 basis points, but I’d like to know whether you consider that your monetary policy is still in restrictive territory, given that inflation has also fallen by 125 to 150 basis points compared to last December and that you were taking total inflation or underlying inflation. So are we still in restrictive territory in terms of your monetary policy, while the unemployment rate is rising and we have excess production?
Mr. Macklem: Yes, we’re still in restrictive monetary policy territory. That’s less the case now than it was, but the fact that inflation has come down means we’re still in restrictive territory. The fact that we have taken a bigger step shows that we want to see growth start to increase. We want to see less stagnation in the economy.
Senator Gignac: With your answers being as succinct as they are, I have a third question about what you just said. When we are in neutral territory, is it in relation to the neutral rate — and we never know what that is exactly — or in relation to the real rate? At the moment, if we take your underlying inflation at around 2.3% and your key rate at 3.75%, that adds 150 basis points to the real rate. When will we be in neutral monetary policy territory using the real rate approach, not the neutral rate approach?
Mr. Macklem: As you pointed out, we don’t know exactly what the neutral rate is. It’s an important concept, but it’s not something we can observe directly. We have an estimate of the neutral rate, as we have to put something into our model in the spirit of transparency, and then we publish our estimate of the neutral rate.
In practice, though, we’re going to find out where the neutral rate is eventually, and that’s one of the reasons we’ve indicated that reactions would be pretty clear if the economy had developed as expected; we would then have anticipated a bigger cut in our key rates. However, every meeting brings its share of movement and this will depend on the data. And what is the terminal rate, as everyone calls it? We’ll find out, we’ll see, it will depend on inflationary pressures. Yes, there is still a production gap, there is still excess supply and that puts downward pressure on inflation, but there is still upward pressure. We’re trying to balance everything out with less upward pressure. We’ve decided to cut the interest rate again, but we’ll be monitoring those pressures closely.
Senator Gignac: Over the past two or three years, population growth essentially explained economic growth, since GDP seems to be falling. You mentioned shocks earlier. It seems to me that, two days after your report was tabled, there was a shock in Ottawa about the new immigration policy. According to the Conference Board and the majority of economists who have published their demographic forecasts, instead of increasing by 1.3% to 1.5% next year, demographics will be stable or decline by 0.5%. What is the impact of this decision by the federal government? It’s well known that immigration policy has an impact on economic growth and the conduct of monetary policy, whether you call it neutral rate or whatever, but your forecasts wouldn’t have been the same if you’d published your report a week later.
Mr. Macklem: As you mentioned, when we published our forecasts, the government announced a new immigration plan. In our forecasts, we have a fairly sharp fall in the rate of population growth, but the new plan suggests that this rate is still falling. I don’t have a new forecast for you today, but it’s clear that if this is the only thing that changes, it will lower the growth rate. Our next forecast will be lower GDP growth in 2025 and 2026.
As far as the impact on monetary policy is concerned, that’s a little less obvious, owing to the fact that, when the population growth rate is falling, there are fewer consumers entering the economy; so that causes less demand growth, but there are also fewer new workers entering the economy, which causes less potential growth.
As a result, the impact on the production gap — there may be a different pace between supply and demand. GDP and demand may struggle with a lower population, so both would be lower. The gap doesn’t change much. So there will probably be an impact on inflation, but the main impact will be on growth forecasts. There will be less of an impact on inflation forecasts.
[English]
Senator C. Deacon: Governor and senior deputy governor, it’s wonderful to see you both here; thank you. About 18 months ago, we released a report within the Senate Banking Committee, and the title said it all: We needed an innovation strategy for the data-driven economy in Canada. You made comments in Toronto on Monday that certainly caught my attention at an event hosted by The Logic, including that obsolete, obstructive policies are own goals in the productivity battles in Canada. I thought that summed it up quite well. You noted that we caused these problems, and that we can un-cause them. There are some good quotes there.
When you say that we need to look at those, specifically in what ways would you like to see Canada look at and act on those items?
Mr. Macklem: Let me preface my answer by saying that our job is monetary policy, and we’re not going to enter into the specifics of individual policies. These are for parliamentarians and governments to determine.
Senator C. Deacon: We’d love your advice.
Mr. Macklem: I can say a couple of things on “own goals.”
As you all know, productivity is a long-standing issue in this country. Coming out of COVID-19, the situation has become worse; it hasn’t become better. That led the senior deputy governor to sound the alarm.
We want to see a concerted focus on this issue. On Monday, at The Logic Summit, I was trying to reframe that. We have a whole range of policies — some of them are very close to your heart: intellectual property policy, innovation policy, monetary policy, fiscal policy and tax policy. These things should be looked at through a productivity lens. They have multiple purposes, but these framework policies are important to our prosperity. That’s going to take some time; that’s not a short-term issue.
There are some other things where there is some potential to do something in the shorter run. This is what I was talking about with the “own goals.” There are well-intentioned policies that are holding productivity back. Why do we have trade restrictions between provinces? Why do we have different labour accreditations for accountants, lawyers, doctors and electricians in different provinces? To some extent, these are well-intentioned policies, but they may well be doing more harm than good.
We have been very successful at bringing people into this country. We’re not always successful in recognizing their credentials and ensuring they get a job that maximizes their productivity.
One of the things I certainly hear about increasingly when I’m outside of the country is so many big international investors are saying the following to me:
Tiff, we’d love to invest more in Canada. You have a great country. North America is a fabulous neighbourhood. You have rule of law; you’re a stable democracy, but navigating the regulatory approvals is taking too long. It’s too complicated, so I’ve decided to invest my capital somewhere else.
Sadly, I’m even hearing this from Canadian companies, many of whom operate on both sides of the Canadian border. Both sides of the Canada-U.S. border are saying, “I can get more regulatory clarity in the United States.”
There are some good reasons for those regulations, and there are some good reasons for those approvals, but if we could provide more certainty faster, I think that would be good. These are some of the examples of what I call the “own goals” — the things that we caused, so we can also un-cause them.
Senator C. Deacon: Thank you very much, governor.
Senior deputy governor, one of the things we have gotten right in the last while is our competition policies and the Competition Act have been dramatically strengthened. The driving of a pro-competitive force within government across government policies — to build on what the governor said — is probably something that you would agree is a very important area for us to continue to push and not stop to say, “Okay, that’s done.” I think we’re just getting started. Is that a fair assessment?
Ms. Rogers: Yes, absolutely. Our office has been meeting with our competition commissioner with his new powers, and we’re collaborating on some research. Yes, we think it’s good.
Senator C. Deacon: It’s an ally in the fight against inflation, as I recall you describing it at one point, having a strong, robustly competitive market. Thank you.
Senator Martin: Thank you both for being back at the committee. I have two questions: One is related to the weak productivity, and another is regarding unemployment.
I’m looking at a recently published TD Bank report entitled From Bad to Worse: Canada’s Productivity Slowdown is Everyone’s Problem. I’m sure you’re aware of that. The report contained the warning that without significant improvements in our labour productivity, Canada risks a continued decline in living standards, wage stagnation and potential strain on public services.
In your October Monetary Policy Report, you noted that the manufacturing sector has been held back by weak productivity growth. I’m wondering whether you can comment further, sharing your insights and other advice regarding how we can address this, particularly in the manufacturing sector.
Mr. Macklem: It’s a very big topic. Sadly, we would largely agree with the statistics that you quoted.
Why does the Bank of Canada, in particular, talk about productivity? It is because productivity determines the rate that the economy can grow without creating inflationary pressures. With interest rates, we can get the economy operating at its productive capacity, but, fundamentally, if we want to grow the economy, we have to grow that productive capacity. An important way to do that is to raise the output per worker. That’s what pays higher wages and expands your tax base. Yes, I’m very aligned with your opening comments.
How to fix it? I talked about a couple of the ingredients in response to Senator Deacon. The other thing I would say is that the proximate causes of our low productivity growth are evident. Canadian businesses invest less in new machinery and equipment, they invest less in research and development, or R&D, they have fewer new patents and they’re less innovative, so that’s why productivity growth is slower. But why do Canadian businesses invest less? Why are they less innovative? Why do they have fewer patents? Why do they spend less on R&D? Those are more difficult questions.
We have to be careful not to overly generalize. The reality is that we have some fabulous companies in this country that are competing very successfully in global markets. They are investing, they are innovating and they are highly competitive globally. It’s the middle of the World Series, so I’m going to use a baseball analogy. We have companies that are hitting home runs, but our batting average isn’t very good. The average is too low, and that is holding back the country. We have to look at our strengths. How do we double down on our strengths? How do we get more of those companies that are hitting home runs? It’s not as if we can’t do it; we can. We have to get the average up.
Senator Martin: I’m questioning why. This is something for the committee to wrestle with. I have one quick question: In your policy report, you talk about youth unemployment, particularly among newcomers, indicating that it is above 12%. I don’t know if you could further explain this rate and talk about what can be done.
Mr. Macklem: Do you want to say a few words on the labour market, Ms. Rogers?
Ms. Rogers: As I mentioned earlier, if you go back a little more than a year, companies were having trouble finding workers. When we look at the labour market conditions, we look at the participation in the labour market, the amount of hiring that’s going on and the number of vacancies. When the economy was very overheated, we saw a lot of unfilled jobs, so a lot of vacancies were going without workers.
What we’ve seen more recently is the labour market has moderated. We haven’t seen unemployment climb, and we haven’t seen a lot of layoffs, but we have seen those vacancies come down.
To come to your question about youth, they’re looking for their first job. They’re the marginal employee in the labour market. Often if you see unemployment increasing, you’re going to see it first there.
We’ve been bringing employees into the country faster than the labour market can absorb them now. For a long time, we needed employees coming in. As that hiring has come down, that’s why you see the numbers showing up in newcomers and, in particular, youth.
The Chair: Regarding those early indicators in the young age group, is that a canary in the coal mine? Is that usually where the numbers show up first? Is that troubling for you?
Ms. Rogers: I’m not sure that I would call it a canary in the coal mine. It would be typical that’s where you would see the numbers show up first.
Senator Varone: I’m not an economist; I’m more of a pocketbook economist, if you know what I mean. But the Bank of Canada stated that it has various preferred measures of core inflation, one being CPI-trim and another being CPI-median. When deployed, they exclude the volatile components of the consumer price index, or CPI, which then generate what the Bank of Canada refers to as core CPI, or CPIX. And that excludes the eight most volatile components of the CPI, such as mortgage interest and gasoline.
I get confused when you talk about core inflation. Isn’t that confusing more Canadians, given that mortgage interest costs, gasoline costs and food prices cause Canadians the most grief, yet that’s excluded from the calculations? Isn’t it akin to me saying that I’m very wealthy if I exclude all my debt obligations?
Mr. Macklem: I’m sorry we confused you. Clearly, we need to do a better job of explaining it.
Let me underline a couple of things.
First of all, our target is total CPI inflation. We want to get total CPI inflation to stay close to 2%, toward the middle of the 1% to 3% range.
Senator Varone: Core inflation hitting 1.6% —
Mr. Macklem: The total is at 1.6%; for core inflation, the two measures are 2.3% and 2.4%.
Why do we look at core? The reason we look at core is, month to month, there are some very volatile components of the CPI. The most obvious one that we all see every week at the gas pump is gasoline prices. They go up and down with global oil prices. What we influence is through the underlying centre of gravity of inflation — the trend of inflation. We can’t control the monthly fluctuations coming from oil prices going up and down.
Interest rates influence demand in the economy. Demand relative to supply influences the underlying direction of inflation.
We use our core measures as a way to try to separate the volatility from the underlying direction. We use them to help us get the total CPI inflation at our target. They’re sort of like an instrument or a tool that we use to help us see if the total is going to stay where it needs to stay or if it’s headed in the right direction.
It is important that Canadians understand that the reason we target total CPI inflation is no consumer basket is perfect, and everybody in Canada has a slightly different consumption basket. But the CPI is designed to be the best representation of the consumer basket of Canadians, and we want the rate of change of the prices in that basket to stay close to 2%.
Senator Varone: Thank you.
Senator Fridhandler: Thank you for appearing here. In fact, the very answers you’ve given somewhat answer the question I have, which started from the International Monetary Fund, or IMF, report in 2022 that criticized the disclosure level of policy deliberations within the bank. I think your response was that, in January of 2023, you were going to commit to improving disclosure relative to those deliberations.
First, what happened in that space? Second, on a broader level, I see that as disclosure, but you’ve demonstrated here today a more — I’ll probably scare you if I say an “activist role” in talking about monetary policy and the economy. In fact, at one point, you said that some of that stuff is for parliamentarians. But I wonder to what degree you’ll share your goodwill or credibility with Canadians in educating with more of an activist or education role, which is the other part of the disclosure role. I’d be interested to hear what you can say on those two points.
Mr. Macklem: I’ll say a couple of things, and then I’ll ask Ms. Rogers to say a few words.
To go back to the IMF report, they gave us very high marks on transparency. They had some suggestions that we took on board. Ms. Rogers, why don’t you say a few words? Yes, we took their recommendations. We’ve also been doing a number of other things, and I expect we’re going to do some more things.
Ms. Rogers: A couple of the specific things that we did, particularly in response to the IMF report, was we started publishing what we call a “summary of deliberations.” After each interest rate decision, about a week or two weeks later, we publish a summary of the discussion that the governing council had. We also go to a press conference after every decision. The governor and I used to do one only after every other decision — our Monetary Policy Report decisions when we release our outlook — and we now have a press availability after every decision. Those are two specific things.
If I think about your broader question, you used the term “activist.” I don’t know that we would use that term, but an important principle to us at the bank is ensuring that we’re being clear in plain language. It’s disappointing to hear that we’re not doing a good job on core inflation. That is one we struggle with, though, so it was a good question.
We have some basic standards in the bank. When one of us makes a speech, we use special software to measure the level of education that you would need to understand our speech, and we try to make sure that we speak at a level where we’re most likely to be understood by the most number of Canadians.
We have a section on our website called “The Economy, Plain and Simple,” where we provide plain language explainers about the more complex topics and words that we sometimes use.
We’ve also significantly increased “regional outreach,” which is the term we use, but it just means how often members of the governing council are out talking to Canadians. Our governing council members kind of divide the country up at the beginning of the year, and we each try to go out and visit communities. I was out in Calgary last year. A member of our governing council was in Red Deer a couple of weeks ago for a couple of days. Those are all things we do — it’s “activist” in the sense that we want to be understood. We think we’re more effective if Canadians understand what we’re saying, so we try to get out there and talk to them.
Senator Fridhandler: Thank you for those efforts. I think they’re important, and it has been upgraded from what we’ve seen from the bank in recent years.
In your remarks, governor, you mentioned monitoring elevated geopolitical risks. When we hear that, we generally think of something negative. Some are obvious to most of us here.
Are there any positive geopolitical risks that you’d like to speak to?
Mr. Macklem: They are generally negative. I won’t give you the long list of negatives; you know what they are.
I would say, though, that this is a time of change in global alignments with regard to what other countries are trading with. To give you a very prominent example, if you go back to 2000, Canada had the biggest share of U.S. imports. Between 2000 and 2020, our share went down and China’s share went up. China had the highest. In recent years, due to China moving up the value chain and competing more directly with other countries — it is not the low-cost producer — combined with a greater use of tariffs and trade restrictions, China’s trade with the U.S. has gone down. Canada is now back to second. Mexico is number one. Trade is shifting. If you are a Canadian business, there are opportunities. My advice is that you need to be alive to the fact that there are shifts going on and look for your spot. Where is a spot in a secure supply chain? Canada is a secure place. We are a good partner. We are a safe partner. How can we help other countries solve their security problems and enter into those secure supply chains?
There is no question that geopolitical uncertainty is not usually good for growth. It is not good for investment. It is mostly negative, but we can’t be paralyzed by that uncertainty. Canadian companies need to be looking for where the opportunities are. We have something to offer.
The Chair: Thank you. Senior deputy governor, I’m assuming that the “break the glass” had a high educative value. Did it deliver the message?
Ms. Rogers: It sparked a renewed debate. It has been around for a long time.
Senator Yussuff: Thank you, governor and senior deputy governor, for being here. I’ll ask you some tough questions because I think they are on the mind of a lot of people who are paying high interest rates for their mortgage. Inflation has finally come down, and they think you are still keeping your foot on the brakes. They are wondering when they are going to see relief that will make their life a little more stable, as well as that of their family, but also equally contribute to the economy in a greater way so that they are not spending so much money trying to manage their mortgage.
Mr. Macklem: First of all, we are acutely aware that this has been a difficult period for Canadians. We survey Canadians regularly. We hear from them very directly. Higher interest rates have made it harder for them to get their budget to match with their income. You can see that Canadians are cutting back on discretionary spending in particular. On consumption per capita — in other words, in individual households — it has gone down, even though consumption in aggregate has been going up because we have been adding people to the economy. With respect to when we are going to lower interest rates, we have lowered them four times by 125 basis points. We have been clear that we anticipate lowering them further unless we are surprised by economic developments. We started in June. That’s starting to pass through to Canadians. You are starting to see some signs. Certainly, consumer confidence has been low, but it has stabilized. There are signs that it is starting to tick up. We expect that will continue to come up. It is something we are watching very closely. We know that lower interest rates will pass through, and household spending will pick up. There is always uncertainty about how quickly it will happen and how much we have to drop rates to get the pickup we need, and that is something we are watching closely.
Senator Yussuff: There is an elephant in the room that we are all staring at, and we’ll find out next week where that elephant will land. Our American friends — depending on who wins the election — are talking about tariffs that will have a devastating impact. We export almost 80% to the United States. Every sector exporting to the United States is going to have a devastating effect. Is the bank taking this into consideration, recognizing it is going to further diminish any possibility of growth if we end up having to mitigate whatever the Americans do, should a certain individual get elected in the United States?
Mr. Macklem: I’ll say a couple of things. First of all, as this committee is well aware, we don’t comment on Canadian politics. So we are certainly not going to comment on American politics. I will say a couple of things, though. It returns to Senator Fridhandler’s question. Regardless of who wins the election in the United States, the world is a more hostile place. There is more conflict in the world. There are more trade restrictions in the world. The U.S. and China are competing for economic power. If you are running a business, economic security is now part of trade policy. It is not only about efficiency. It is about national security and economic security. That’s a reality. It’s not going away. How that gets managed by the United States is going to depend on who wins the election, but the broader issue is there either way.
The second thing I would say is that Canada and the United States have a very good trade agreement. Everybody knows that the United States is the biggest destination of Canadian exports. Not everybody knows that Canada is the biggest destination of U.S. exports. In fact, for 32 of the states, that’s true. It is not just the northern states. It is pretty broad-based. This is a trade relationship which is in both countries’ interests, and it has endured through different administrations. Given that it is in both countries’ best interests, you would expect both countries would want to keep it.
The Chair: Thank you very much.
[Translation]
Senator Massicotte: Thank you very much for joining us; it’s very nice of you. This is always a very important event for us. I have two questions.
In your press conference, when you announced the report, you said that “you feel in a good place” about the 2%. You were very comfortable with the 2%. Why 2%? Why not 0.5% or 3%? Why is 2% comfortable?
Mr. Macklem: That’s a very good question. The short answer consists of two reasons. First, inflation at 2% is low enough that households don’t need to worry about major changes in the cost of living from one year to the next. The changes are small enough from one year to the next. That’s a very low inflation rate.
The other reason is that we’ve had a 2% target for the last 30 years or so, and what we’ve seen is that the economy works better when inflation is low and stable. As far as inflation goes, 2% is low and stable. Yes, we have a lot of studies and I could go into more detail, but these are the broad outlines.
Senator Massicotte: Here is my second question. In your presentation earlier, you referred to the fact that we were initially the largest importer from and exporter to the United States. Before the tariffs, we dropped to second place, but with the tariffs, we’re back in first place. I’ve read reports indicating that it’s true that fewer products are going directly from China to the United States, but indirectly, through Mexico and other countries, the same quantity is being imported into the United States as before. It’s a bit wrong to say that Canada may be number one; that’s because we don’t consider the whole route of products that end up in the United States after taking a detour through Mexico and other countries.
Mr. Macklem: You’re right, it’s not…. I’ve simplified it a little. Yes, trade is changing. There is less trade between the United States and China, but there is more trade between the United States and Vietnam. A large proportion of these goods come from China and go to the United States. We’re seeing a lot of Chinese investment in Mexico to gain access to the American market. They’re starting to talk about it in the U.S.
In some places, that raises a lot of questions, so we’ll see.
I think that, for Canada, that’s clearly not the case. If the United States has problems, Canada could be the solution, as I said earlier. This geopolitical uncertainty is not good, but there may be opportunities for Canada.
Senator Massicotte: Thank you.
[English]
Senator Ringuette: I have always been concerned about productivity. You said that we have some that are hitting home runs. Yes, it’s the ones in the big leagues. We don’t pay attention to the ones playing in the little leagues. My question is this: I understand that your model is national in scope, but coming from Atlantic Canada, I have found that in the last three years, monetary policy had a bigger impact in Atlantic Canada than in Central Canada. I’m concerned. Then I look at the elephant in the room and the geopolitical tension. Our national exports to the U.S. are 80%, but in Atlantic Canada, 95% of our exports are to the U.S. Nationally, we need to be concerned, but in Atlantic Canada, it is our livelihood right now with the state of things.
In your model, if I have a few questions in regard to the situation in Atlantic Canada, could they be answered?
Mr. Macklem: It depends on what the questions are. We don’t have separate provincial models. We don’t model the country as separate provinces and then add it all up. Our models are national in scope. They reflect, to some degree, the diversity of the industrial structure on average across the country, but we don’t assign it to provinces. We have regional offices across the country. We have one in Halifax, Montreal, Toronto, Calgary and Vancouver. We use those as a base to do two things: We survey businesses and consumers across the country. We have a sense if things are more downbeat or less optimistic in Atlantic Canada than in Central Canada; we have that information. That feeds into the decisions we make. Obviously, we have one interest rate for the country. We are a country. We have one integrated financial market.
Senator Ringuette: Do you have any data on Atlantic Canada to share?
Mr. Macklem: We share some regional breakdowns of our surveys. We have to be a little careful because we want to make sure that if you get to one province in Atlantic Canada, the number of companies that we might have surveyed in that province could be a small number. We have to be a bit careful in drawing conclusions from small samples. We are careful about that. If you average the surveys over a few quarters, you can start to build up a bigger sample for different regions. Yes, we do share that. In fact, every quarter, we publish the results of our surveys. If there are important regional differences, we highlight that. We try to provide some commentary by saying, “This is down, and that was driven by more pessimism in Atlantic Canada.” That’s something that we regularly comment on. Yes, we can direct you to the information we have.
Senator Ringuette: Okay.
Ms. Rogers: I mentioned earlier that we have increased our regional outreach. When I gave the speech on productivity, it was in Atlantic Canada. It was in Halifax. I spent a couple of days there meeting with Atlantic businesses, community groups, universities and Indigenous communities. One of the things we ask our governing council members to do is to come back and share all of that feedback with our governing council colleagues. It all feeds into our understanding of the economy. There is a strong feedback loop.
The Chair: Thank you for that.
Mr. Macklem: We have a vast country. That’s a wonderful thing. It is important to understand what is going on in the many regions of our vast country.
The Chair: Thank you. I have a couple of questions here before we go on to the second round. We have heard from the government that they intended to extend their borrowing authority. We are watching new spending programs, and we are watching politicians negotiate even more spending over the next little while. You have said in the past that government spending is often working at cross purposes with the central bank’s efforts to bring down inflation. I think the quote was “It would be helpful if monetary and fiscal policy was rowing in the same direction.” Are you closer to that or not?
Mr. Macklem: I would say that on the monetary policy front, we have made a lot of progress. We are now back to 2% inflation. We are not trying to get inflation down anymore. We are trying to get it to stay where it is. We have some excess supply in the economy, and the labour market is soft. We are in quite a different situation. Those comments were when the economy was overheated, and we had raised rates forcefully to get inflation down. In that context, increases in government spending — particularly if they were faster than the potential growth of the economy — could row in the opposite direction to bringing inflation down. My comments then were very much in that spirit.
Now we are in a different situation. I think we are back to a more regular situation where the central bank governor doesn’t comment on fiscal policy. We are no longer trying to get inflation down. Government spending is not pushing against us getting inflation down. We have brought it down.
The Chair: My second question is a more current comment. You said that during the pandemic, for most credit products, the share of those borrowers missing payments reached historic lows. We are now seeing a larger share of these borrowers lagging behind on credit card and auto loan payments. This is concerning. Is that changing, or is that where we are at?
Ms. Rogers: We are still seeing a slight uptick. I’m just going to return to Senator Yussuff’s question earlier. There has been a lot of focus on mortgage holders. They are directly affected by interest rate changes. Where we have actually seen more financial stress is with renters. The credit products that we look at there are more in terms of loans and credit cards. We have seen arrears and late payments ticking up more sharply there than we have seen in mortgage arrears. In mortgages, we are still below our historic level. We are still seeing very low arrears in mortgage payments.
The Chair: It will take longer for lower rates to have a positive impact on a renter than it does on a mortgage holder.
Ms. Rogers: Yes, although we have seen early indications in certain markets that rents are starting to turn over a bit. We are watching that closely.
The Chair: Thank you. We’ll go to the second round.
Senator Loffreda: Governor, we have two main concerns in Canada, and we often discuss the lack of competition and the low productivity. I’ll talk about the low productivity and continue on that note. I agree with the way you put it. We hit home runs, but our batting average is too low, and you need a bit of both to win.
You mentioned we invest less in manufacturing and equipment. We invest less in R&D. I have often said we are great at putting money into R&D, but we can’t monetize it. And we’re less innovative.
I’d like to question you on the “why.” Without a “why,” the purpose fades and progress stalls, so we need a “why.”
The Parliamentary Budget Officer, or PBO, observed during one of our committee meetings that he noted a productivity growth issue linked to small business tax incentives. The data suggests some businesses avoid growing beyond a certain threshold to continue benefiting from small business tax rates. There is a concentration on top, and it is not distributed. There is a sharp deviation in the expected distribution patterns, and I will not go into it.
Has the Bank of Canada observed similar evidence on how small business tax rates might impact productivity? According to your research, which policies are most effective in enhancing Canada’s productivity?
Mr. Macklem: In my role as Governor of the Bank of Canada, I’m careful about what I say about tax policy. We run monetary policy, not tax policy.
I have seen these studies. To return to your question, the questions about why we have less investment and less innovation are very difficult.
There are some things you can see. Before I was the governor, I was the dean of the business school at the Rotman School of Management at the University of Toronto, and I was interacting a lot with the innovation sector in Canada. What you could see was that in the last 15 years, our innovation ecosystem at the start-up phase has been much stronger. You are getting more start-ups and more innovation.
Where we are having trouble is now scaling those companies to be globally successful companies. Increasingly, business is so much about scale now. The network effects of scale are large. Why is the U.S. the global productivity leader? Well, it probably has something to do with their having the global champions. The magnificent seven are getting huge scale economies.
I’m not going to weigh in on tax policy, but I think if you want to get scale, you need to look at your levers to use them to encourage scaling.
Senator Gignac: According to many experts, with this multipolar regime, the world economy will experience more supply shocks.
You have already mentioned that monetary policy is not the best tool to deal with a supply shock. Would you agree that macroprudential measures would be a much more interesting and effective tool than monetary policy?
Mr. Macklem: It is going to depend a lot on the kind of supply shock. With the kind of supply shock that we had during COVID where global supply chains were all gummed up, I’m not sure that macroprudential policy could help you too much with that.
It is not so much that monetary policy isn’t the right tool for supply shocks. It is more that supply shocks are just harder for everybody to deal with than demand shocks. Whether it is fiscal policy or monetary policy, if you get a negative demand shock — demand is low and inflation is low — when you put monetary stimulus in, or possibly fiscal stimulus, that brings demand up and keeps inflation stable.
The problem with supply shock is you have GDP going down and inflation going up. We have one instrument. We can’t get them both in the same direction.
There may be some scope for fiscal policy. If fiscal policy can identify the problem and there is a targeted instrument that can address the problem in a more surgical way, then there is potential use for fiscal policy.
Senator Gignac: They have some cases of real estate bubble or stock market bubble where macroprudential measures are much more effective.
Mr. Macklem: We have been using macroprudential policies in this country.
Ms. Rogers: Financial stability rather than monetary policy tends to be where we think of macroprudential tools.
Senator Gignac: Here is my follow-up question: We are parliamentarians, and we want more transparency. In Canada, we have the Senior Advisory Committee, and when I worked with you, you invited me to attend, so thank you for that. For my colleagues, it is a forum for the financial sector that includes financial stability and systemic vulnerabilities. It is led by the Deputy Minister of Finance.
In the U.K., it is completely different. The Bank of England leads that, and their debate is public. That helps us as independent senators to figure out what the best thing to do is. In Canada, it is obscure. It is not disclosed and so on.
Would you agree that this kind of governance could be improved if it is led by the Bank of Canada?
Mr. Macklem: Well, the Bank of Canada and the Bank of England have some important differences in their responsibilities. The Bank of Canada does monetary policy, but it does not do prudential oversight or prudential regulation. That is the job of the Office of the Superintendent of Financial Institutions, or OSFI, in Canada.
In England, the Bank of England has both. It’s as if OSFI were within the Bank of Canada.
I think that explains why the Bank of England does what it does, and the Bank of Canada does what it does.
With respect to the Bank of Canada, our focus is on the financial vulnerabilities of financial risk that could have systemic consequences. We are transparent about that analysis. Once a year, we publish our Financial Stability Report. We have a financial stability hub, and when we have new reports, we put them out on the hub.
With respect to the Senior Advisory Committee, I participate in that. It is chaired by the Deputy Minister of Finance. I think that is something you are going to have to raise with the Department of Finance.
Senator Varone: COVID changed our lives in many ways. I remember having to do conference calls daily in business. Now I can’t remember the last time I did a conference call because everything is on Zoom.
But one of the things it also introduced to us was remote working. There is a raging debate in industry right now as to the productivity levels when working in person versus working remotely, and now even trade unions are starting to strike with respect to trying to secure the right to work remotely.
Is it something worth studying? Has the Bank of Canada looked at that from the lens of productivity?
Mr. Macklem: Is it worth studying? Yes, I think it is worth studying. Is it something the Bank of Canada has looked at? No, it is not something we have looked at. It’s one of these things that everyone seems to have a strong opinion on, but nobody seems to have a lot of evidence.
My anecdotal observation from talking to different industries is it probably depends on your business. For some companies, the remote possibilities mean they can get talent from all over the world, and they can get it to work. For other companies, the value of being together in person is more important. I’m not sure there is a one-size-fits-all.
There are a growing number of studies at the firm level that are looking at these things. I have seen some of the studies. Some things are very measurable, such as coding. You can measure the number of lines of code. When they study whether coders are more productive when they are working from home or when they go to the office, they find they tend to be more productive when they go to the office.
That is one kind of task in one kind of business.
It’s worth studying. Every business is grappling with this.
We are grappling with this in our own business. Our solution has been to offer our employees more flexibility post-COVID than they had before COVID. We think there’s some value to that. At the same time, there are some activities that are definitely done better in person, so we’ve given direction.
For those things that really need to be done or are better done in person, they should be done in person; you should come to work to do them.
The Chair: This is a follow-up round, so I will ask senators to stay focused and short; that would be great.
Senator Massicotte: Just to provide this to colleagues, in The Economist, there’s a very good article — never as good as the governor — on productivity from two weeks ago. It made reference to Canada.
When we make-believe that we are sitting in your situation regarding what to do with the decrease, I always ask myself this: Are you better off having two one-quarter corrections, or one half of 1%? It is the same quantum. Is there an impact or a psychology toward the gap in the augmentation of the interest rate?
Mr. Macklem: There are probably some psychological impacts, but I have to say that we’re not psychologists. It’s very hard to predict what the psychological impacts are.
For us, it’s a bit more straight up. Why did we cut 50 and not 25? We could have cut 25. I think the reason to do 50 was that inflation came down a little faster than we expected. Part of that was clearly global oil prices, which are volatile, so you have to be careful putting that one in the bank. Also, as Ms. Rogers mentioned, you are starting to see rents come off, and shelter price inflation is rolling over, so the upward pressure is coming off a bit. For a number of goods — footwear, shoes and cars — you’re seeing outright price declines.
To return to core inflation, the underlying trend in inflation has come down, and the economy is growing. It’s soft, and for the second half, it looks like growth will be slower than the first half. You put those things together and look at the labour market indicators, inflation indicators and output indicators, which all suggested a bigger step was appropriate.
It probably has some psychological impact, and that’s probably helpful. It gets more attention. People see interest rates are coming down, so maybe that’s a bit of a confidence builder. That would be a bit of a bonus.
Senator Massicotte: Thank you.
Senator Marshall: I have a question similar to Senator Massicotte’s question. The bank has been through a rocky period, as has Canada. When you were here a couple years ago, I asked you about the credibility of the bank. What is your sense of it now? Do you think people see the bank as more credible than they did, say, two years ago? Can you just respond to that? It’s probably an unfair question, but my sense of it is, yes, there’s more credibility now with the bank than there was. What is your sense of it?
Mr. Macklem: Periodically, we do some polling, so I would say two things: Public awareness of the Bank of Canada is higher, and I think that just reflects the fact that it’s been a very tough few years for Canadians. The Bank of Canada has taken some extraordinary actions, lowering rates to emergency lows and then increasing them at the fastest pace we’ve ever increased them.
Inflation has had a big impact on Canadians’ lives. Interest rates have had a big impact on Canadians’ lives. Awareness of the bank is higher.
In terms of our trust levels, they did dip for a while. We’re now seeing that they’re coming back.
Senator Marshall: On a positive note, there is a lot of good information on your website. I know that some of the information that you relayed to us tonight, like the information on the renters, is very well put out on your website. I’d like to end my questions on that positive note.
Mr. Macklem: I would underline it this way: The way we see it is that we need to earn Canadians’ trust every day. The fact that we have gotten inflation down without causing large-scale job losses or a recession has certainly improved our credibility. But we have to stick the landing.
The Chair: I want to follow up a bit, because this is a question we hope to come to. As you know, we’re doing a study here at the Senate Banking Committee on the mandate of the Bank of Canada. You’re engaged in your own review. The time has come; I think you’ll start in the new year.
To the point about what you have been through and what you have learned from that process, are there structural changes or new questions that you’re looking at as a result of what we’ve all been through, including you on the front lines?
Mr. Macklem: That’s a big question.
We have learned a number of lessons. I’ve talked about them in some speeches, and I wrote a chapter on the topic for a book. We’re also conducting a thorough review of our COVID response, looking at the three key elements: the extraordinary liquidity facilities we put in place to restore market functioning, the use of quantitative easing and then quantitative tightening, and the use of exceptional forward guidance. Many working papers and research studies have come out from that, with some more to come. We have engaged an outside panel of experts. They are three individuals — a former central bank governor, an American academic and a Canadian academic — who are deeply steeped in these issues to review our review. The purpose is to get an independent assessment and to see if we asked the right questions. Are our conclusions credible? Are there other questions we should be investigating? Are they convinced by our conclusions?
Our study, together with their report, will come out some time early next year. They have the report now and are in the process of reviewing it.
I don’t have total control over when it gets done, because it’s in their hands, but I do expect it will come out early next year. We’d be happy to talk to the committee at that time.
I could reflect upon some of the lessons learned, but maybe we just want to leave it until we have the full report.
The Chair: It has come up, even in the question I asked earlier in terms of your relationship — the tough times. What provoked you to make your remarks about government spending was the timing and the event. Regarding that relationship between fiscal and monetary — you and the government — is that part of the review that you’re also looking at?
Mr. Macklem: We’re looking at our actions as opposed to the government’s actions. We’ve largely taken the government’s actions as this: Given this is what they did, what would be the best thing for us to do?
The Chair: Do you have any comment at all on the dual mandate issue that has come up in other countries?
Mr. Macklem: No. We took our mandate as given. Our job is to control inflation and keep it close to the middle of the 1% to 3% band. We took our governance structure as given. We took our relationship with the government as given. Then we looked at the actions we took within our framework, as I said, to restore market functioning, the use of quantitative easing and the use of exceptional forward guidance.
The Chair: We’ll definitely have you back on those.
Mr. Macklem: Those are questions, but when you’re reviewing your COVID response, it’s not the time to review your governance. It’s about focusing on the actions we took in the structure in which we operate.
Senator C. Deacon: Thank you, governor and senior deputy governor, for being here with us.
“Stability” is a word that we’ve heard a lot in today’s discussion, and we hear it a lot about its importance to business investment and growth. However, in an ever-changing world, stability can become stagnation if you’re not careful. You were very specific about the need for changes with regard to interprovincial trade barriers. There’s unanimity on that issue everywhere except in premiers’ offices. That’s a place where stability hasn’t helped Canada. We’ve been very stable with our interprovincial trade barriers. Can you help us unpack the word “stability,” because in an ever-changing world, we have to be changing how we run our country? So when that word gets used, I struggle because we need to be seen, I think, as responsive to the world as it changes. For me, the word “stability,” as it’s often used, is often counterproductive to that. Could you help us there?
Mr. Macklem: When we’re using the word “stability,” we’re not trying to stand in the way of change, but financial stability and price stability, in our view, are things that lay the foundation. If you can take away the uncertainty for businesses about big changes in their input costs, or if you can take away the uncertainty for a business about whether a bank is going to cut off their credit because the bank is having their own problems — if you can take away those uncertainties — that provides a more certain and more predictable environment for businesses to operate in.
Hopefully, if they don’t have to worry about that, they can worry about changing their business model, worry about innovating and worry about R&D. We’re not trying to stand in the way of change; we’re trying to ensure that Canadian businesses don’t have to worry about certain things so that they can worry about the things that would actually move us forward.
Senator C. Deacon: Thank you.
That’s very important in the way the bank communicates, because there’s a lot of leadership on the fiscal side that takes that term, and that term is used often by oligopolies to maintain the status quo. That is holding Canada back, in my opinion: maintaining the status quo in terms of our fiscal policies. Is that a fair observation from your standpoint? I’m pushing you up against that line.
Mr. Macklem: You are. I appreciate your feedback on the communication. I think it’s important that we use words carefully and that we’re clear. And, yes, competition is part of the issue, for sure.
The Chair: Thank you. Right up to the line.
Senator Ringuette: I have a short to-the-point question. A few months ago, through legislation, we added an additional deputy governor to the Bank of Canada. Has the additional deputy governor been hired? What is the impact?
Mr. Macklem: It’s actually not through legislation. We don’t need legislation. The Bank of Canada, with the approval of the board of directors of the Bank of Canada, can do that. We have added one external deputy governor already; he’s been with us for about a year and a half. We’ve been very pleased with this innovation in our structure, so we have decided to add a second external deputy governor. You would have to quit this job, but the poster is up if you want to apply. You can’t do both; there are rules against that. The recruitment process is open. We’ve hired a search firm; people are applying. We’re in the process of recruiting a second external deputy governor.
Senator Ringuette: Are these fixed terms, or are they permanent?
Mr. Macklem: Yes, they are fixed terms. It’s a two-year appointment, with the possibility of renewing it for either one extra year or two extra years. You want it to be long enough so that they get on board and are fully contributing, but you also want some turnover. One of the reasons to have these external deputy governors is to bring in fresh perspectives. If you get one and you keep them forever, you’re not going to get a continual fresh perspective. With two, the idea is that their appointments will be staggered so that every year and a half or so, you’ll have a new member of the governing council bringing a fresh perspective. That’s part of the purpose.
Senator Yussuff: I have two points. I want to reflect a bit on one of the greatest crises we’ve seen in the country: the pandemic. There has been a lot of criticism of the bank and all the things that were done. I was in another place trying to figure out how we were going to keep the economy going. In reflection, despite the criticism, I don’t think Canadians have an appreciation for the wisdom or the leadership that got us through that crisis.
From a personal perspective — representing three and a half or four million people — people’s lives could have been completely different had we made the wrong decision. In retrospect, people tend to be a little bit complacent, but I want to say, without any hesitation — because I know the conversation was happening within government and at the bank level about what to do to keep this economy going — we got out of it. We were struggling with some other issues, but we weren’t the only ones. We didn’t predict the supply chain getting gummed up the way it did.
But in the context of high interest rates to try to get inflation back under control, it would be fair to suggest that the people who have done well despite the high interest rates haven’t contributed as much to this economy. We’ve had this debate here, and we’ll continue to have it: Some people took advantage of the fact that we didn’t control what some chains in the supply were doing and how they were managing it.
In retrospect, regarding your ability to communicate to ordinary Canadians — because the bank tends to sometimes speak to itself in that cadre of people who are cheerleaders or critics of you — they don’t benefit from the fact that, ultimately, what you’re trying to do is give them stability in their lives. Ordinary people who live on a fixed income don’t have the luxury of waking up in the morning and flying off somewhere else to figure out whether life is better. As the bank struggles with how to learn from its experiences, I think it will be very important to also learn how to better communicate with ordinary people and other sectors in the economy, which are not your traditional allies of whom you go talk to.
Mr. Macklem: I couldn’t agree with you more. As Ms. Rogers has highlighted, we are using digital technology to try to reach audiences that we haven’t reached. You can find us on Instagram now. You can’t replace face-to-face conversations. You have to get out across the country and hear about where they live and their lives.
Linked to your question, Senator Marshall, one thing that comes through very clearly when we do focus groups and talk to Canadians is that the more they understand what we’re doing, the more trust they have in what we’re doing. We’re a public institution. We have a responsibility to be accountable to Canadians, but there is an extra bonus because the more they understand, the better monetary policy works, the more they trust us and the more they have confidence that they can do things because the central bank is going to keep inflation low and stable. It’s not only that there’s accountability, and we have a responsibility to do that, but it also works better if we do it well. I couldn’t agree more; we need to be accountable to Canadians. Canadians need to understand what we’re doing, and we need to understand how Canadians are feeling and how our policies are impacting them.
The Chair: We’re going to try to do some very quick questions here. You’ve been very generous with your time, so I’m going to say this again: short, sharp and pointed.
Senator Fridhandler: Just to pick up on a comment from Senator Deacon, I hear it all too often in discussions on productivity and the like.
Here’s a quick background: We all know in the mid-1860s, there was a deal struck amongst a number of provinces to form a new federation. And 150 years later, in dealing with the beer case on interprovincial trade, the Supreme Court was very strict in their interpretation of what could happen there. Yet I continue to hear how we have to deal with interprovincial trade. We can’t deal with it constitutionally. It’s fully in the hands of provinces, but what is your view in terms of monetary policy relative to what we can do here? I don’t know if you can affect it as the central bank.
Mr. Macklem: I don’t think we can do anything. I mean, if you want a suggestion, I think if we come at it from the point of view of trying to harmonize hundreds of small differences between provinces, we’re going to be working on this until we’re all well into retirement. We came at it from this perspective: Could we mutually recognize that there are some differences and just live with them and not worry about them? Maybe we could make progress faster.
The Chair: Thank you for those responses.
Senator Loffreda: One area we did not touch on is artificial intelligence, or AI, and the impact it will have on productivity and our economy. I know you have spoken recently in Toronto and delivered a speech entitled “Artificial intelligence, the economy and central banking.” How can we maximize the impact that AI will have on our economy and productivity? Are there any policies or measures that you see that we can put in place? Are you more concerned or more positive on the impact it will have?
Mr. Macklem: I think AI has tremendous potential. AI is a very good microcosm of the longer-term issues we’ve had in this country. Geoffrey Hinton just won the Nobel Prize for his fundamental advances in AI. We also have a number of other global-leading AI experts in our university system in Canada. On the other hand, if you look at the adoption of new AI technologies in Canadian businesses, they’re lagging. We’re smart. We’re good. We are inventors, but we have to capitalize on that. We have to commercialize that, and too often in Canada, a Canadian invention gets commercialized south of the border and a lot of the benefits flow south of the border.
This is part of our productivity problem. I don’t have all the answers, but I think this is an example of where we need to really focus on a specific issue.
Senator Gignac: Thank you again for being so generous with us for these two hours; it’s very appreciated. Just like my colleague Senator Deacon said, we like to push you because we get the best from you. My question will be close to that.
Mr. Macklem: I know what I should do, I guess.
Senator Gignac: You succeeded, more or less, in bringing back inflation to the target of 2%. Mission accomplished. The jury is still out regarding the soft landing, possibly with the announcement last Friday by the government on population growth. On my first question, you mentioned at the beginning that your monetary policy is still in the restricted zone, and now the unemployment rate for young people is 16%, which is 6% higher than the U.S.
Could you confirm to us that you’re not behind the curve, given the transmission lag that we have in Canada possibly regarding interest rates? Your 50-basis-point reduction will have an impact on this many months from now, and the unemployment rate continues to rise. I like to push you.
Mr. Macklem: Are there risks on both sides? Yes, there are risks. If you look at our base case projection — what happens — population growth is going to come down next year, and we’ll have to see how sharply. Our projection has consumption and GDP per capita rising. There is some uncertainty. When one thing is coming down, the other thing is coming up. How exactly does it net out? We’ve already lowered interest rates quite a bit. We signalled that we expect that there’s more to come. That will pass through, and we think that will strengthen household spending.
Our own forecast is gross reasonably stable. As population growth starts to stabilize, the fact that GDP per capita is picking up wins out, and growth picks up a bit. We will be revising our projections, and we certainly have to look at the impact of the new population or the new immigration plan published by the government. I expect that will pull our headline GDP forecast down. Even with that, our forecast is that the economy is expected to grow.
Senator Gignac: The borrowing rate cut is still one meeting at a time, but it’s still a possibility.
Mr. Macklem: I think we’ve been pretty clear. We’re taking it one meeting at a time. We’ve demonstrated we’re prepared to do a 50-basis-point cut if we think that’s appropriate. If we think it’s appropriate to do it again, we’ll do it again.
Ms. Rogers: I was going to add something to Senator Yussuff’s point, because I think it was an important one. I wanted to tell you a story. I was talking earlier about increasing our outreach and expanding the types of groups that we speak to.
A couple weeks ago, I spent an evening in Vancouver with the heads of business improvement areas for all the small communities across the Greater Vancouver area. These are people who are running small businesses; they’re independent operators. We had the lead for the West Hastings community, and people from Vancouver know how tough that community is. There’s a guy with a tough job. He’s trying to increase business activity in that community.
I sat and spoke with him for three hours and learned a ton about what the economy feels like on the ground in those communities. I was amazed at how knowledgeable they were. They had all read our last Monetary Policy Report. They had been on our website. They had read speeches. I don’t know if they would have done that if we hadn’t invited them to come spend an evening with us. It feels like it was a win-win. I learned a lot from them; they learned a lot about us. It’s a good news story in terms of what you’re suggesting.
The Chair: Thank you all very much. We really do appreciate your time and effort. We range all over the map here, and sometimes we put you on the spot, but we genuinely appreciate it. Thank you, Mr. Tiff Macklem, the Governor of the Bank of Canada; and Ms. Carolyn Rogers, the Senior Deputy Governor of the Bank of Canada. We are very appreciative of your time and insights today, and we will see you again soon.
For the members of the committee here, we return to Bill C-280 in our meeting tomorrow, for your information. See you all then.
(The committee adjourned.)