THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, October 24, 2024
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 11:30 a.m. [ET], and in camera, to examine and report on Canada’s monetary policy framework.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello to everyone and welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy.
My name is Pamela Wallin. I serve as the chair of this committee. Let me introduce the other members of the committee with us today: our deputy chair, Senator Loffreda; Senator Deacon, Nova Scotia; Senator Fridhandler; Senator Gignac, Senator Kutcher is in for Senator Yussuff today; Senator Martin; Senator Massicotte; Senator Ringuette; and Senator Varone. I thank you all for being with us today.
On October 10, 2024, the committee was authorized by the chamber to examine and report on Canada’s monetary policy framework. Today under this mandate, we have the great pleasure of welcoming, in person, the Honourable Diane Bellemare, former senator, actually a former senator for about a week ago. She is a longtime colleague here in the Senate and a very important voice on this committee for many years. We have welcomed her back to participate in this because this issue is near and dear to her heart, the mandate of the Bank of Canada and rethinking some of the rules.
She had actually proposed legislation on this issue. When we as a committee, at her behest, agreed to study this issue, she said that would be the better way to approach it. She is still a true senator in her heart, knowing that the committee process does the valuable work needed.
Ms. Bellemare, I know that you have opening remarks. The floor is now yours.
Hon. Diane Bellemare, former senator, as an individual: Thank you. I’m thrilled to be here with you. I could hardly wait to do this presentation. My English has been a little rusty this past week, but it will come along.
I will do my presentation in French and English and respond to questions in French and English as well.
[Translation]
Thank you for the invitation to appear before you in the context of the study on the Bank of Canada and the renewal of the monetary policy framework. I will focus on the mandate of monetary policy and briefly touch on targets and their measures.
[English]
First, the actual monetary policy framework opens the door to the adoption of a dual mandate. Since 1991, monetary policy has officially been aimed at price stability. This objective is outlined in the five-year joint statement presented by the Government of Canada and the Bank of Canada, which specified the inflation target.
This statement is more of a convention, and it is not required by law. It is prepared by the Bank of Canada and approved by the Minister of Finance. It is tabled to the Parliament of Canada without debate.
Since 1991, the inflation target has been set at 2%. The latest agreement specified that monetary policy aims for an inflation target of 2%, the midpoint of a range between 1% and 3%. The target is based on the annual rate of increase of the overall consumer price index, or CPI. This target has remained the same since 1991.
However, the December 2021 statement, the latest one, added that the Bank of Canada will consider a broad range of labour market indicators and will systematically inform Canadians of how it has considered employment trends in its monetary policy decision.
The Bank of Canada has not officially adopted a dual mandate as is the case in the United States and in Australia. However, one may argue that the last statement opens the door to a dual mandate.
[Translation]
Secondly, the advantages of the dual mandate outweigh the disadvantages. As you know, I support the adoption of a dual mandate for monetary policy. In 2018, more than 60 Canadian economists, including Pierre Fortin, Andrew Sharpe and Mario Seccareccia, called on the Minister of Finance to amend the Bank of Canada Act to provide for the dual mandate.
There are many reasons to support the adoption of a dual mandate for the conduct of monetary policy in Canada: it allows for more balanced growth by smoothing fluctuations in the policy rate; it creates a more stable environment for investment and productivity growth; by promoting economic stability, it contributes to social cohesion; it also reinforces public confidence in the institution that is the bank; the dual mandate seems particularly well-suited to a confederation like Canada, as it forces the bank to take account of a broader reality — employment and prices — than just the rise in the consumer price index; finally, previous Bank of Canada studies conducted in 2021 on the performance of the dual mandate — which stands for “dual objective” — indicate that it would have performed just as well on inflation as the inflation-targeting strategy, while having a slight positive impact on employment.
[English]
Opponents to the adoption of a dual mandate argue that these objectives are conflicting and could complicate the formulation and communication of monetary policy, possibly compromising the central bank’s credibility in controlling inflation. In fact, the real economic and social benefit of the dual mandate outweighs the disadvantage, which can be countered by a good communication strategy.
Third, the adoption of a dual mandate would necessarily involve a better and more formal coordination between fiscal and monetary policy. This is a good thing. This is exactly what economic theory prescribes. It can be done. The last 2021 statement already acknowledges that the government and the bank have a joint responsibility for achieving the inflation target and promoting maximum sustainable employment.
The next statement could provide more specific ways for better coordination between monetary and fiscal policy.
[Translation]
Fourth, future risks provide a strong argument in favour of adopting the dual mandate. Today, much more than in the previous century, the global economy and that of Canada are bathed in uncertainty. This is a universal observation reaffirmed in the World Economic Outlook tabled last Tuesday, October 22, 2024. Supply shocks such as those experienced since the pandemic are expected to recur.
[English]
As explained by Governor Tiff Macklem, it is much easier to restore demand than supply. The risks are now greater than in the past that inflation will rise mainly from supply shocks. If that is the case, a monetary policy based upon a fluctuation in the policy interest rate could be inappropriate and costly as suggested in chapter 2 of the recent IMF study that they tabled last Tuesday.
Therefore, I propose that the Standing Senate Committee on Banking, Commerce and the Economy recommend in its study the adoption of a dual mandate for the renewal of the monetary policy framework, the next one, the inclusion in the framework of a more formal recognition of the government’s responsibilities for achieving a dual mandate and a review of the Bank of Canada Act to modernize the act.
[Translation]
On the other two topics in the study, I am of the opinion that the target should remain in the 1% to 3% range, but should not focus on a 2% target at all costs. The target should be flexible. I also recommend that the achievement of this target be measured by the consumer price index, without taking into account the impact of the increase in the key interest rate on the CPI measurement, as is the case in Sweden. Thank you very much. The review will begin.
[English]
The Chair: Thank you very much, Ms. Bellemare. I was about to say “senator” again. I will catch myself a couple of times today I think.
I’m sure that everyone in the room knows, but for those watching us today, the Bank of Canada itself is embarking upon a study of its mandate. We are doing this in coordination with them, and we hope that our study will be useful to them as they pursue that and as we look at this.
There are many questions, I am sure. We will begin with our Deputy Chair, Senator Loffreda.
Senator Loffreda: Welcome back. There is so much to cover, but I think you have said it well with inflation, and it is a dynamic environment that we’re in. The root causes in the past were scarce resources and excess liquidity. Today, we have geopolitical concerns, reindustrialization and energy transition, which is going to cause inflation. We all know the Bank of Canada’s current mandate is to focus and promote the economic and financial welfare of Canada, and a key element is inflation control, right? We all know that.
I want to go back to the September 2024 article, which you wrote in The Globe and Mail and how that would relate to the dual mandate. You mention the importance of pursuing other strategies to address the root causes of inflation, other strategies, including the implementation of competitive strategies, changes to labour market policies and budgetary and fiscal measures.
Could provide specific examples of how change in the mandate would enhance the competitive strategies, the labour market policy adjustments and the fiscal budgetary measures that you believe would be most effective in curbing inflation and promoting the economic and financial welfare of Canada, which is the prime objective of the Bank of Canada.
Ms. Bellemare: Thank you, senator, for this question. This is a big question, and I may not have all the specific answers.
Senator Loffreda: We save the big questions for the big people, right?
Ms. Bellemare: Wow. Let me talk about a subject that I know more.
If you had a dual mandate — and the dual mandate, as you know, is price stability and maximum employment, sustainable employment or full employment, as it is written in the Australian objective — when you have that, it is certain that monetary policy will always target more price stability, because it has the basic interest rate that they can move up and down to try to suppress or increase demand.
You need coordination with the tools of the government, but if there is a commitment, then it is easier and more stable for the economy. What kind of coordination can it be?
At the beginning, when they talk about that kind of thing, even though the Swedish government does not have a dual mandate, they do take into account what is happening in the labour market. They were the first ones to use the labour market policies when there is real damage on the employment side.
What to do? They use the active labour market policy to promote stability in employment instead of going to the unemployment and to train the people. The government, in those very exceptional times that happened in the 1980s in Sweden, they had all sorts of programs to train the workforce so that when the crisis was over, they would be ready for new technology. That is one example.
Another example would be the sectoral shocks. When you read the report of the International Monetary Fund, which analyzed what happened during the pandemic, they have, in Chapter 2, an analysis that is quite stunning. They admit that when we have sectoral shocks — as we did — to play with the policy interest rate may be inappropriate. It may damage the economy. It is appropriate if it is accompanied by an excess demand.
They foresee in the future a lot of supply shock. What they do propose for governments is to check on a more micro basis with research what is happening within different sectors of the economy to preempt a bottleneck and to enforce measures which are not monetary but more budgetary or fiscal policy. They could involve training. They could involve subsidies. They could involve anything that you may think of, depending on the moment.
Another issue is competition laws. Of course, when you have a cow, some sectors may take advantage of it and try to keep their share of the profit, so they play on the prices, on the margins, and so you have to check on those specific issues.
This is what it means, taking advantage of coordination. It also means concretely to have it spelled out in the agreement that the bank and the government sign. It is not a complete given to the Bank of Canada to promote price stability, because, indeed, price stability is a big issue, and the government has a kind of responsibility in it too.
On the fiscal side, it could be — and now I know some will be pleased, but others not, but it may imply some fiscal anchor for the government in their budgetary system, depending on the ups and downs of the economy, but to have it spelled out within the agreement. When you read about it more, it would imply — like the Australian bank has reviewed their act.
I will leave it for another question, but they have a position —
The Chair: We are trying to get around the room here, because I know there are many questions.
Senator C. Deacon: Lovely to see you, Honourable Diane Bellemare.
I want to explore that dividing line between fiscal and monetary policy, because I gather the Federal Reserve actually has a third mandate, which is not spelled out but understood, and that is to moderate long-term interest rates.
I also harken back to the break-the-glass emergency statements by our Senior Deputy Governor and Governor earlier this year on productivity challenges in Canada and the role of productivity in creating a more resilient economy and one that expands supply more rapidly without inflationary pressure and that can manage hits from global markets with a little more resilience. Where do we find that line?
I want to look at that line between fiscal and monetary, because the effects on one side have effects on the other side, and we know that. I am interested in the fact that the Federal Reserve has been really considering in their decision making this third moderation of long-term interest rates. It caused me to say, “Okay, well, is there a fourth, a fifth or a sixth?”
What are the considerations? Why just two, and where is that dividing line?
Ms. Bellemare: In fact, the broad aim should be what is spelled out in the Constitution, that the Government of Canada is promoting prosperity for all. The Government of Canada has given its own responsibility to print the money in the Constitution, it gave that to the Bank of Canada. That was created in 1935. The big objective of the bank is written in the preamble of the act, which has not been changed since its adoption in 1934. These are the broad objectives.
On the U.S. side, in the 1970s, one senator in particular, Senator Humphrey, pushed the idea to change the Federal Reserve Act to insert a dual mandate. That means it should promote price stability, without a specific target, and full employment, without a specific target. No country — like Australia or the U.S. — has a specific target for the unemployment side.
Now, when you say a third and a fourth, certainly all countries want prosperity, and that is the medium- and long-term objective. As you know, if you promote long-term stability in the interest rate and in the returns, that works together with price stability and low unemployment.
I don’t see any problem with adding that. The issue is what the target should be? How do you cope with price stability with a specific target and unemployment or growth at the same time?
It is a matter of you cannot have specific numbers for unemployment because it is a large issue. You have to look at different factors. It is a matter of are the vacancies equal to the number of people who are looking for a job? You have to manage it, as do all the banks. You manage it from time to time, from period to period in a year.
Am I answering your specific question?
Senator C. Deacon: I will not ask you to go further on this.
I am struck by the fact we have been through a period of very stable interest rates up until this most recent inflationary event, very stable prices leading up to and until 2020, stable prices and long-term interest rates; yet, we saw a continuing decline in productivity which is critical to our prosperity. That is where my question is at.
Ms. Bellemare: I am not sure. Yes, we had some kind of stability since 2010. Before that, the interest rates in Canada — and even today, the real interest rates in Canada — have always been higher than elsewhere, because we look at price stability. We are on the sure side. We exceed a little bit when we press on the pedal of price stability because of our one and unique vision.
I think that productivity, like elsewhere, it might have been more stable, the interest rate. I did not do the study. I suspect there is a link there. In the 1980s, we started to have real interest rates much higher.
In the book I wrote and published in 2013, I looked at the real interest rates compared to Canada, the U.S.A. and Australia, and they were above those countries. There is a link there with the productivity.
[Translation]
Senator Gignac: Welcome to our honourable former colleague. Before I ask my two questions, I would like to thank you for all your service and contributions over the past few years. As I understand it, you will continue to contribute as a monetary policy researcher and that will inform our work.
That said, could you tell us more? You said that one of the reasons for the advantage of the dual mandate is that it allows for more balanced growth by smoothing out fluctuations in the policy rate. Could you elaborate on this or send us more documentation? You must have compared the United States, which has a dual mandate, with Canada. I’m curious to hear what you have to say about this.
Ms. Bellemare: Yes. In the past, I have indeed made comparisons over longer periods with the United States, Australia and other countries. I’m not the only one to have done so. The Bank of Canada has too, as has the International Monetary Fund.
As a summary conclusion, countries that have adopted a dual mandate are doing better in terms of growth and productivity than Canada. We can see that Canada is on a slippery slope compared to the United States. We’ve seen the data prepared by the Productivity Institute, which is based at HEC.
On this front, there is an impact. In terms of inflation, it’s possible that we’ll have a slightly lower inflation rate than in the United States and Australia, but not excessively so. We’re in the low inflation range.
That’s the cost. In terms of employment, these countries have lower unemployment rates.
Senator Gignac: You have three recommendations for the committee. The third is to review the Bank of Canada Act. When the time comes to review legislation, we know that it can be complex. Among the arguments you mentioned in the public arena — you talked about governance, lack of transparency and diversity of opinion — I note that, without changing the law, they have just opened a second position of external deputy governor. Do we really need to change the law, when the Governor of the Bank of Canada seems to be saying that he can do a lot without changing the law?
Ms. Bellemare: It is clear that the law gives full powers to the Governor of the Bank of Canada.
[English]
The Governor of the Bank of Canada can do whatever he wants. They have a lot of power. It has to have the permission when you hire somebody to cover for the quality of the person, there are some practices he has got to follow. They have a lot of power in the law.
The Bank of Canada Act has not been revised for a long time. It does not include a monetary policy committee section. It includes nothing about the practice that we actually do. It does not have any mandate for the Bank, nor for the monetary policy. It only has a large preamble.
[Translation]
The language of the preamble is a bit old-fashioned. I am not the one who said that, but a former governor of the bank, who told me that if the act is revised, the preamble should be reviewed, because it’s old language from the 1930s.
The other central banks are reviewed regularly, so it would be good if the Bank of Canada Act were reviewed.
However, there’s a political problem attached to this task. The Bank of Canada cannot itself initiate a review of its act. It could suggest to the body that does it what it would like to see in the new law that would accommodate it and provide a framework for its functions. The Minister of Finance is often in a rather delicate position too. Right now, I can’t see the government saying, “We’re going to revise the law”; everyone would be suspicious and it wouldn’t be a good thing to do.
On the other hand, the Senate is better placed to do this review in a serious and long-term way, not within a month or two, but taking all the time needed to review the law and see what other laws provide.
Senator Ringuette: Senator Gignac, my line of thinking was similar to yours. First of all, Ms. Bellemare, thank you for being here and for insisting that we do this study on a dual mandate and on greater flexibility in targets. I think we’re all on the same wavelength, at least I hope so.
As long as we’re studying the bank and making recommendations, one of the elements is surely what the external committee you’ve already told us about has put in place, as has Australia. For them, it was a question of better risk management versus a more isolated core of people in decision-making.
I’d like you to tell us about what Australia has put in place and what should be considered as part of the study the committee has just begun.
Ms. Bellemare: Thank you. That’s a very interesting question. I’m not sure whether the monetary policy committee has completed what it was supposed to do. What Australia has done — and the report was tabled in 2023 — is an exhaustive review of the law; one of the recommendations was to have external members. Six were recommended in Australia.
I was looking at their website, and Australia is currently trying to adopt the report’s recommendations. The idea behind this is to have a broader vision of reality than the vision of those who perform the function of central banker.
[English]
As you all know, and if you want to check it out — I did check it out — those who decide on central banks, usually they come out of the same universities or the same kind of thinking. This has been stated in the review of Australia.
To have only a common vision to cope with monetary policy, which has a tremendous impact on the day-to-day life of individual enterprises and our prosperity as a whole; it is a danger to have only one vision, because reality cannot be stated in one or two statistics.
To answer this, it was proposed to have experts coming from a wider horizon, a variety of horizons, with specific knowledge of the labour market, supply management or any kind of international trade issues that is related to the economic performance of the country.
[Translation]
Senator Ringuette: I have an additional question, since you studied the American system.
Ms. Bellemare: Yes.
Senator Ringuette: Does the American system also have an external committee?
Ms. Bellemare: Yes and no. In a way, yes, there are external members from the various banks, in other words bankers, but they ensure regional representation through rotating terms. There are five or six governors from the other central banks with rotating terms. That is similar to the European Central Bank, which is responsible for monetary policy and the interest rate for all of Europe. Its governing council is made up of country representatives with rotating terms. There are around 12 of them, which is quite a lot.
Having external members helps expand the vision.
[English]
It is also an advantage, if I may say, for ensuring the independence of the bank, because the more you’re under, you can —
[Translation]
Senator Massicotte: Thank you, Ms. Bellemare, for your good work, contributions and the commitment you showed as a member of the Senate. Thank you on behalf of all Canadians. Thank you very much.
You’re an expert in the subject, given all the research you’ve done on the various central banks.
You talk a lot about how the bank should have a dual, rather than single, mandate. Concerning the rest of the bank’s governance structure, especially its board of directors — in terms of the executive committee — are there other recommendations you’d make?
Ms. Bellemare: What I proposed in my bill was mainly to specify the bank’s mission in the act and have a section about monetary policy that clarifies the dual mandate. Monetary policy has huge impacts, and I proposed having external members. I also proposed that external people regularly assess the monetary policy, under the oversight of the monetary policy committee.
The bank reviews what it does, but there is no process. It’s an internal assessment. As you know, the bank is currently reviewing its policy during the pandemic. It hired two economists you could invite here, Ben S. Bernanke and Trevor Tombe, to oversee the review. Mr. Bernanke was Chairman of the Federal Reserve.
The bank is doing things it wasn’t doing before. That’s very good. It should continue on that path and do a concrete assessment of the results.
[English]
It is easy to show that the actual monetary policy works by looking at data. You see, oh, the interest rates have evolved over time in such a way. The inflation rate evolves in such a way. There seems to be a correlation between the two. Is the correlation actually causality, or is it an apparent correlation?
An evaluation of monetary policy would look in more detail about the impact of playing with the policy rate and the impact on growth, employment and price stability.
[Translation]
Senator Massicotte: You are an expert in employment and unemployment. You often say that an excessively high interest rate has consequences far beyond the figures we see. It affects people’s lives. It’s an issue that concerns you. It might explain why the suicide rate has gone up all over. That’s something we neglect because we can’t put a number on it. Tell us about that. Is it very high?
Ms. Bellemare: Thank you for the question, senator. That’s an area that is very close to my heart.
[English]
I always looked at the monetary policy. When I was appointed as the CEO of Société québécoise de développement de la main‑d’œuvre where I had to manage manpower policies, the unemployment rate was high at that time. The Governor of the Bank was playing with the interest rate. It was during the second part of the 1990s. We experienced that.
[Translation]
We were very often forced to play musical chairs with people. By that, I mean that people were losing their jobs, and there were no jobs because the unemployment rate was too high and business weren’t investing. The monetary policy was too restrictive, so we would get them jobs with time-limited subsidies. After a while, their jobs would end, and they would become unemployed again and receive employment insurance, or EI. We were playing with EI, social assistance and job placement in Quebec. We did that for years. Why? Because we had a plentiful labour supply and monetary policy was too restrictive, so small and medium-sized businesses weren’t able to invest.
You’ve probably had personal experiences yourself lately. I’ve had small business owners come up to me and say, “We have to walk away from the investment we were planning to make.” The interest rate had quickly climbed to 5%. Young people have told me, “Ms. Bellemare, we’re on hiatus from school and don’t know when we’ll go back because we can’t afford to pay our tuition anymore.” The impact of interest rate hikes on investment and the uncertainty caused by fluctuations in interest rate hikes are very real.
In the past, my colleague and I have done studies on it to figure out the social costs, but the social costs of fluctuations in the employment rate are huge.
[English]
Senator Varone: Welcome back. I always appreciate these learning moments from you when you speak.
I was interested in the comment you made that it’s much easier to restore demand as opposed to supply.
In the dual mandate, I want to juxtapose it to the housing market. When Governor Macklem was before us, he made a big deal about shelter inflation and the reason why interest rates were at the level they were. He was trying to control an overheated housing market.
Fast forward to today, cranes have come down in the housing sector. There’s probably the highest unemployment in that sector in terms of trades themselves. People are staying home because there is no work, the demand has not come back, and there’s absolutely no supply. When you look at the commodity of housing, labour has come down in price. Steel and lumber have come down in price, and the only people that intervened were the municipalities themselves that raised all the development charges.
I look at what a dual mandate could do, and I’d like your opinion on whether the mistakes that were made with respect to housing in Canada — because it is at an absolute crisis proportion — could have been avoided if the governor of the Bank of Canada had a dual mandate to look at both employment and inflation.
Ms. Bellemare: Thank you for the question. That’s a tricky one.
First, I think you described the impact of the actual monetary policy when focused on price stability and with the interest rate on the housing sector very well. The cranes are down. This is what you said.
When you play with the interest rates to cope only with inflation, you have an inappropriate and sometimes very bad impact on the supply side. This is what the International Monetary Fund says in their last report, so you have to be very careful when playing with interest rates when it’s not a general excess of demand.
Second, for the housing sector, we heard there were demographic issues, a lack of planning — a lot can be said on that side — but certainly, the monetary policy didn’t help.
With respect to hidden inflation, I know the Bank of Canada and all central banks are really scared about spiralling inflation working its way through wages and all sorts of hidden sides. I think those are serious fears, but there are other ways to play them down than to play with the interest rate. Because all of you are investors, you know when you play with the rate of return, the plan that you make, especially for a small firm, is good today, but suddenly, it’s not good a month later, because of what is happening with the cost of capital.
With a dual mandate, you try to work with a balance, to work on other kinds of scenarios also, but you have to work in coordination with the government.
Senator Varone: Thank you.
Senator Martin: It’s very nice to see you. It’s like you’ve never left, so we do miss you. I’m learning a lot as well. I heard you say that the benefits outweigh the opposite of a dual mandate, and you outlined all the benefits.
I have a two-part question. The first part is: I’m aware that in 2023, Australia rejected the idea of a dual mandate for their central bank that would have required the bank to give equal consideration to employment and inflation, so just that balance. I’m so curious as to what you would say about that and what we can learn and in our study. The second part is, Australia’s southern neighbour, New Zealand — we’re kind of New Zealand to the U.S. in terms of size, not the land mass, but in terms of population — last year, New Zealand’s Finance Minister, Nicola Willis, said that the 2018 move to a dual mandate in their country was a mistake, and she stated:
With no hierarchy of objectives, the introduction of a dual mandate heightened the risk of a future policy error – with monetary policy led in multiple directions, even as inflation embedded itself in the economy.
Is there something to be learned from the New Zealand example?
Ms. Bellemare: I’m happy you brought up New Zealand because in your first comment, you mentioned Australia.
Senator Martin: Australia didn’t want to give equal consideration.
Ms. Bellemare: Australia still has a dual mandate, but they don’t have a specific — as the U.S. had at some point in time. The governor said that we will accelerate price stability. You have to manage that as effectively as possible, but let’s talk about New Zealand.
The New Zealand government that was in power in 2018 adopted a dual mandate. In the last election, in 2023, I think the Conservative government won. The Conservatives had said during their campaign that they would abolish the dual mandate to go back to price stability because inflation was everywhere, and the 2% rate of inflation, which was the target, was not achieved. However, it wasn’t achieved anywhere else either because we had a lot of international problems.
So when the Conservatives arrived in power — this will tell you what I think about it — they tabled a bill to abolish the dual mandate, and it was rushed. There was no study done at all, and it was adopted like that. They changed the law. There’s no dual mandate in New Zealand now. It’s only price stability. They did it without any study because it was an electoral promise. I’m not sure they have an inflation rate to target anyhow because they didn’t do any studies. They just said that now inflation was too high and it was because of the dual mandate. We’ll see in the future, but they didn’t change anything, and if it’s agreeable for your committee, you might want to call witnesses from New Zealand because the external members of the bank are still there.
My more developed answer would be that it was a political issue. Inflation harms everyone, and the newly elected government wanted to say that they were doing something to fight inflation, so they abolished the dual mandate, but I don’t think it will have any effect necessarily on the efficiency of their policy.
Senator Martin: Thank you.
The Chair: We’re going to second round, so I’ll ask everyone to please keep their preambles short. We can ask questions. We don’t need long preambles because our time is running out.
Senator Loffreda: I’ll touch on an area which I feel is important when we look at the mandate of the Bank of Canada: independence. I say that because when Governor Macklem was here during the COVID crisis, I asked him if there was a blurring between fiscal policy and monetary policy, and he was outright firm. There’s no blurring to him. For our listeners, the independence of the Bank of Canada free from political influence to look at the long-term economic objectives, rather than short-term political considerations, is very important.
I want to add, though, as it’s important, not all global central banks are independent. There are some partially independent central banks. I’ve been looking at that, for example, the Reserve Bank of India and the Bank of Japan. There is some political influence there.
Should the Bank of Canada consider and coordinate more closely with fiscal policy to achieve broader economic goals? Should it work more in tandem with government fiscal policy to address issues such as economic recovery or long-term growth? We did mention we have certain issues in Canada like productivity, and competition is obviously a concern also.
I’d like your insight on that.
Ms. Bellemare: Thank you for the question, senator. It’s quite an important area of thought, and you need a balance between independence and accountability. It’s not easy to find, but you also need to ask the question: What does it mean to be independent? I think you pointed out that in order to be independent, the Bank of Canada should not act with respect to partisan timing, election timing and so forth.
[Translation]
The independence of central banks is closely related to political partisanship. Central banks should not necessarily act for the purposes of influencing public perception of the government at critical times.
[English]
Now, should the bank become completely independent of its own action? Should it be so independent that it can pursue their own goals with specific numbers, no matter the cost? I say, “No,” because the law by which they are governed says they have to promote prosperity.
When you look at the banks of other countries, some — like in Canada, we are quite balanced on the target, because the Bank of Canada, with the government, agrees to a target, but all the studies are done by the Bank of Canada. It’s not done by the government. They make a statement, and the government agrees.
In some other countries, the minister of finance would give a specific target to the bank in terms of inflation, and the bank is independent from an operational point of view.
[Translation]
Banks are independent as soon as they decide to increase interest rates and choose which way they will do it. They are independent operationally. We need to take that into account.
[English]
The Chair: Thank you. We are going to try and move through this, so I need shorter questions and shorter answers as well.
Senator C. Deacon: Thank you again, Ms. Bellemare, for being here.
I want to keep looking at this interface between the independence and the partisan reality, the monetary and the fiscal, because the International Monetary Fund, and others, found that 40 to 50% of global inflation following the pandemic was as a result of increased corporate profits. That meant in Canada, for example, the whole population paid dearly for the benefits to a very small portion of the population. It would have meant that, for example, our top inflation rate would have been 4%, not 8%, potentially.
That interface, I’m just wondering about the role of the bank in communicating some of these facts as we’re going along to influence fiscal policy, which it totally stays away from. To me, that’s a really important element, because half of what they’re fighting is being caused by something that could be addressed.
Ms. Bellemare: Thank you for the question. I will answer by stating the recommendation that the expert that did the review in Australia — and it includes Carolyn Wilkins — and what they proposed to pursue with the dual mandate and the triple mandate, because in Australia — they have the growth also; it’s written somewhere — they recommended that better coordination be made with monetary and fiscal policy, and to help do that, they suggested that a team of independent researchers work with the committee that meets for monetary policy — and that would include representatives of the government and the central bank — to help them to pick and make the best decisions on the fiscal side and on the monetary policy side. They work with research that can come from the bank, but also with the independents.
That’s a way to monitor close coordination that would be a benefit for Canada.
Senator C. Deacon: You just agreed that that is an issue? That interface is really important? Thank you.
Ms. Bellemare: It has to be looked at, of course. This issue doesn’t resolve like that.
The Chair: And from time to time, the Governor makes statements that maybe it would be helpful if spending were constrained. We hear him saying some of those things.
[Translation]
Senator Gignac: Thank you for sending the documentation to the committee. Something that intrigued me was the Bank of Sweden. There were many aspects, but one of the ones I found innovative is excluding the interest rate from the inflation measure. You mentioned that at the end of your remarks. It was in our special study; it was one of the three points about the preferred measures of inflation.
Why do we need to do that? You mentioned early in the year that if we had removed the effect of mortgage interest rates, inflation would have been under the 2% mark for a long time.
Ms. Bellemare: I completely agree with you, Senator Gignac. You’re an expert in these matters since you study them every day.
Yes, I’ve always said that we need to be very careful with monetary policy because it generates inflation. Throughout the period we went through, the 30% increase in the consumer price index was caused by the hike in mortgage and rental costs. According to the article we published with Pierre Fortin, the inflation rate would have been 1.9% last January if we’d excluded it, and Canada would have been under the 2% mark for a long time. The interest rate is too high.
Senator Gignac: We’re running out of time. Intellectually, why should we remove the effect of interest rates, since some banks do that and others don’t?
Ms. Bellemare: We need to remove it to get the right target. We don’t want to include the effect of the policy on the target.
[English]
In Sweden, what they did, and what they do, is they calculate the consumer price index with a constant interest rate. They take out the impact of the increase in interest rates on the Canadian —
Senator Gignac: They have less volatility.
Ms. Bellemare: If everyone is interested, Senator Gignac and I did study these kinds of things and look at other banks during the summer with a PhD student, and he produced a nice document. If you would like, we could table it for you, and it compares mandates and targets.
The Chair: Thank you. That would be very helpful.
[Translation]
Senator Massicotte: The objectives are set with two criteria instead of one. When we make a decision, if the two are equal, we need to choose. The reality of the argument, whatever the expectations or comments, is that we always have one objective: If they are equal, we need to choose. If we have only one, it’s easy to determine which takes priority. It’s much clearer. The same goes for the Caisse de dépôt’s argument. There are now two, whereas there used to be one. Two is artificial, and if they are equal, we need to decide. Why not be clear from the beginning and say that objective number one is x?
Ms. Bellemare: I have a very clear answer: because Canada is hitting the gas too hard to reduce inflation, at an incredibly high cost to the country.
Senator Massicotte: Is that why you support the dual mandate?
Ms. Bellemare: The reason is that it puts the brakes on. Before deciding to dramatically raise interest rates, a whole series of calculations are made, which the Bank of Canada has already done. When I wrote my book in 2010, I calculated the cost of a 1% increase in the unemployment rate. The Bank of Canada had a special study showing that when the unemployment rate rose by 1%, it cost GDP 2.4%.
Senator Massicotte: Based on what you’re saying, since the Bank of Canada can make a mistake, the idea is to have two constraints so that it doesn’t make the same mistake twice.
Ms. Bellemare: Exactly, because the facts show that countries —
Senator Massicotte: Is it a way to hide incompetence?
Ms. Bellemare: No. It’s a whole set of factors. The Bank of Canada has a governing committee that was very closed-minded until recently. It is starting to open up to new realities. Adopting a dual mandate means it has an obligation to take into account the effect on the job market. Right now, I don’t know whether job market studies are submitted. In other words, with a dual mandate, there is more systematic research into the right thing to do for the entire economy.
Senator Massicotte: Thank you.
[English]
The Chair: Your comment that there is so much emphasis on the interest rates, but are you happy with the 1% to 3% range?
Ms. Bellemare: I think so, a range of 1% to 3%. When you look elsewhere, it is common sense. If it is always 3%, it is a high price increase.
I would not make a target of 2%. When you target 2%, then you play with the rate of interest. By playing with the rate of interest, you play with all the computations for what a good or bad investment is. You have a real impact on the economy.
You look at the range. You are more certain to look at the range if you have a dual mandate.
A third thing I wish to add is that monetary policy takes time to have effect. When you play with that, then nobody knows what to do.
The Chair: Thank you.
Ms. Bellemare: I commend the Bank of Canada. They have done the best they could do with the objectives they have. Their last statement with the government opens the door for the dual mandate. I think it is the right thing to do.
The Chair: Senator Ringuette, followed by Senator Varone.
Senator Ringuette: You will remember two years ago when the Governor was here in front of our committee, I asked him how much the increase in your interest rate contributing to inflation is, and he did not answer. You say about 30% as per your study.
My question is: If we look at the dual mandate, flexibility between 1% and 3%, and an exterior advisory body, do you think, in a similar situation, the monetary policy would be better equipped to reduce the high pitch of interest rates?
At that time, for a number of months, nothing was done. All of a sudden, there was a huge increase over two to three months that was, as you said, detrimental for economic development. You think these three recommendations should mitigate such a situation?
Ms. Bellemare: This is what I think. I know we came out of the pandemic. It was an unknown, a lot of uncertainty. We will go back to those kinds of issues.
[Translation]
Everyone says we’re experiencing uncertainty right now, but cost inflation can happen at any time because supply chains can be disrupted.
In this tough environment, I think that monetary policies should take into consideration that they need to act on supply. To do so, interest rate fluctuations…. If we have a target, we have only one element in mind. We play around with it, which has the opposite effect of what we want to do, which is to act on supply.
We can’t rewrite history, but I think we’ve learned from the past. What we’ve learned is that we need to be cautious. The dual mandate would allow for more flexibility, as well as being a bulwark, just like the Senate is a bulwark vis-à-vis the House of Commons. The dual mandate is a bulwark against draconian monetary policy.
[English]
Senator Varone: I fully embrace the notion of a dual mandate.
How cautious should we be as a banking committee with respect to the definitions of core inflation, core employment? I harken back to when Governor Macklem was before us. He had a statistic of core inflation. He did not include shelter or food inflation because he said they were outliers and this is the core inflation.
When we are reporting to Canadians or looking at the rules of engagement with the Governor of the Bank of Canada, it is how things are defined that truly creates an issue for me. I would like your opinion on that.
Ms. Bellemare: I will answer by telling you what comes into my mind when I saw the many strikes that were going on lately to catch up with the cost of living.
In a previous life, I worked with the unions when I was at university for the COLA clause and so forth. Nowadays, you do not talk about that. That is inflationary.
What I would say is if you don’t look at the supply side, and if your monetary policy is very strict, you have a problem on the productivity side. Having a problem on the productivity side, you are not able to increase wages and the frustration is high. I say the dual mandate favours more cohesion, can be explained and it will insure more peace in the labour market.
When you have high inflation, you feel it in your pocket. When the interest rates are high, you feel it twice because you have to pay your rent or mortgage. It is very difficult. You want to catch up. When you want to catch up, then you enter into the core inflation. What do you have to do? You have to invest. You have to promote a better way to do things, to increase productivity and the value added so that real wages can increase.
If you are stringent with the interest rate all of the time because you are afraid that wages will go up, then you forgo and delay investment. You create much more dissatisfaction. That is why a dual mandate, when it is well explained — because that is the challenge, to explain that we have a dual mandate with a fixed target on the price side with a series of indicators in the labour market. We will do our best to get out of a period of inflation that is caused by a supply shock, and that is temporary. It is necessarily temporary. You have to explain to the people that you will manœuvre to protect the real economy at the same time, protect employment and investment. There is a challenge on communication. That is why a board with good, external people can help.
The Chair: Senator Massicotte stayed within his time. He asked to use a little more.
Senator Massicotte: I must say, I’m probably influenced — wrongly so — but I’m hesitant to support the proposal because, you know what? It works quite well as-is. They have not done any serious, major errors as some other countries have. I have seen it up close, and it works quite well.
Ms. Bellemare: How do you know it works quite well?
Senator Massicotte: It is my opinion, obviously. Looking to the comparison against the Americans and so on, there is no significant incompetence there.
[Translation]
Ms. Bellemare: It’s the unbearable lightness of being.
[English]
It is very difficult, to know what would have happened if we had not done that.
What I can say, when I compare what others do, their productivity and growth increases more. Their employment is better. They have a little bit more inflation, but not out of proportion, not at all. When you look at that, it tells the story. The dual mandate promotes more growth.
The Chair: We have laid out now where we’re going to go next with this discussion, because we do need to consider Senator Massicotte’s point.
Did you have something very specific?
Senator Loffreda: Very.
I agree we are doing well, but I would expand this, and I think it is an important study, because I have always said, “It is not how well we’re doing; it is how well we could be doing.” I think it is important to lay the groundwork of why this is so important going forward.
I had a question, but I will not make any friends if I go further, but I think it is an important study.
I would say it in a formal mandate. Could the bank more actively prevent financial crises and look at the current role and possibly expand influence over regulating financial institutions or addressing systemic risks?
Do you have a quick thought on that? Should the bank really go further into that?
The Chair: You have five seconds.
Ms. Bellemare: I will limit myself to what I know best.
Senator Loffreda: A yes, or a no.
Ms. Bellemare: I don’t like yes, or no.
The Chair: This is the exact point of the discussions that we will be having over the next weeks and months.
Ms. Bellemare, we really appreciate the work that you have done on this topic and the legwork you did in preparation for the legislation, because it has given us the frame for what our study will be here today. You have laid out the issues beautifully for us.
Thank you so much for that, the Honourable Diane Bellemare.
As you have heard, we will return to this topic on a weekly basis, because it is our mandate.
I will adjourn and ask members of the steering committee to stay briefly for a moment afterwards.
(The committee adjourned.)