THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, November 28, 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 in the room and those joining us online. Welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy.
My name is Pamela Wallin, and I serve as chair of this committee.
Let me introduce the other members of the committee here today: Senator Loffreda, who is the deputy chair; Senator Gignac; Senator Massicotte; Senator Varone; and Senator Martin. Welcome to all of you.
The committee is in the midst of a study on the mandate and the future of the Bank of Canada and a look at our monetary policy framework.
Today, we have with us Dr. Paul Beaudry, Professor, Vancouver School of Economics, University of British Columbia. He is also a fellow at the Bank of Canada, after serving as the Deputy Governor of the Bank of Canada from February 2019 to July 2023. He has been a witness before us before. We’re very pleased to welcome you back, Dr. Beaudry. I gather you have some opening remarks, so the floor is yours.
Paul Beaudry, Professor, Vancouver School of Economics, University of British Columbia: Thank you very much. Hello, everyone. I’ll be short in my opening remarks. I think it’s better that we get into a discussion.
If I look at the aspect of the Bank of Canada’s framework, the three questions we should be asking are as follows: First, looking at the past few years, has this framework worked well? I think it’s been a very difficult time. The framework has been put to a challenge, and that is a good time to judge.
Next, looking forward, given what we have seen, should we be thinking about making the framework change a lot more — revolution or evolution — and getting into that aspect of it? Should there be a big change?
The last issue, which I think is very important, on top of thinking about the standard aspect of policy — in particular, the way and the objectives of interest rate policy — is to keep in mind thinking about the extended tool kit at the Bank of Canada, especially aspects of forward guidance, liquidity provision and quantitative easing, or QE, and how that enters into the general framework.
I will leave it there. I am happy to take questions in French or English.
The Chair: Thank you very much. We have heard in testimony a lot of suggestions about some changes — not major redos, but we’re looking at dual mandate and perhaps a bit more transparency. We will come back to all those issues with you.
We begin questions now with Senator Loffreda.
Senator Loffreda: Thank you for being here. I have a question that I think is important. You just raised the issue slightly, and maybe you can elaborate.
How effective has Canada’s inflation targeting regime been in achieving its goals over the past three decades? Are there any significant lessons or areas of improvement that you would see in that respect?
Mr. Beaudry: Certainly, if we look at the last three decades, I think it divides quite markedly. Before the pandemic, we went through almost 30 years during which the framework in many ways wasn’t tested very strongly, but it was successful. Inflation stayed very close to 2%. If you look over that whole period, it averaged almost exactly 2%. It’s hard to conclude that the overall mandate didn’t work well for that period.
Then we got into the different parts of the pandemic, including the beginning part and how that played out. It still stayed closer to that. Then in 2021, it started deviating. It was hitting that high point by 2022. That has been coming back down and is close to the target.
After being hit enormously by all the shocks of the pandemic, again, it has managed to come back down. We’re back to the 2%.
On the aspect of its mandate of bringing that down, I think it’s been generally successful. We could get into the debate about whether it could have done better in addressing the issue faster — or with different tools — during this most recent period, but I think the general framework has been quite effective.
Senator Loffreda: Thank you for that. We are all hearing a lot of concern about the weakness of the Canadian dollar with the current framework, where we are primarily targeting inflation.
When we look at the mandate, would you be concerned about the weakness of the Canadian dollar at this point? We can dump a lot of numbers as to why — we are a trading nation — and what those numbers are: over 80% of our GDP is import, 45% export, three quarters to the U.S. Would you be concerned or change the current mandate because of the weakness of the Canadian dollar or bring in other factors to determine that specific mandate for the Bank of Canada?
Mr. Beaudry: Again, the dollar is one aspect in the overall package of bringing stability of inflation to Canadians. Again, if you look over this whole period, it has gone up and down, but it has stayed at similar levels overall.
If we look at the more recent period, the big factor is the strength of the American economy and the American dollar. If we look relative to other currencies, we are doing a bit better in different aspects. We have to look at that as a big picture as opposed to looking at the most recent part and remember how it allows us to buffer different parts. To start thinking, “Okay, let’s target the Canadian dollar and how we do it,” would be very tricky and bringing in different parts. But it is certainly something worth discussing that could be brought back into the whole discussion.
Before this more recent period, and I had done research before, I had a tendency to think that maybe we could play a bit more on thinking about the stability of the Canadian dollar, but given the more recent experience and how you want to have a clear mandate to bring inflation back down, I think it would probably be dangerous to bring too much expanding of this type of aspect and bringing the Canadian dollar into the mandate.
Senator Loffreda: Thank you.
[Translation]
Senator Gignac: Welcome, Professor Beaudry. It’s a pleasure to see you again. Given your background and history with the Bank of Canada, you are a unique and privileged witness for us, and I thank you for your availability.
Our special study has touched on a number of aspects that go somewhat beyond the three points we’re raising, but I’d like to know your position on them.
We’re talking about governance, transparency, accountability and having diverse opinions around the table. Some have mentioned that the process for selecting deputy governors is quite different.
In England, for instance, parliamentarians are involved in having more external observers subject to appointment. In the United States, the President appoints the governors of the Federal Reserve, and the appointment must be ratified by the Senate. Do you think there would be any advantage in having our process for appointing deputy governors more open than it is now?
Mr. Beaudry: That’s a really good question, Senator Gignac. I think it could certainly be a more open process. The idea is to have a group that has the confidence of more people and to bring more people into the decision.
Obviously, there has to be a well-established process for making an informed choice, but I don’t really see any difficulty in extending that. Currently, the choice is made in the same way, but having internal deputy governors and others who come from the outside already favours some diversification.
I’m very open to that idea, but often outsiders have the impression that there’s a very narrow set of ideas. I think the summary of the statement helped change that impression. A lot of ideas are exchanged in the board discussion, and after the fact, there’s this idea that everybody comes out with one voice. It gives the impression that everyone had the same ideas beforehand, when in fact a lot of ideas were discussed within the board.
Senator Gignac: I have no doubt that there must be meetings where there is a lot of discussion. Furthermore, some witnesses have suggested that votes be conducted with identification, as in the United States. Others think it would create unease, that there would be discomfort in having this information published, unless the appointment process were modified.
Do you think it would be realistic under the current system?
Mr. Beaudry: There are two different things. On the one hand, there’s the way board members are appointed and the strength they are given; on the other hand — which is a somewhat different issue — we’re talking about changing the established consensus and voting structure. These are two different issues that can be addressed in both cases.
On the voting side, it’s much trickier. I’ve spoken with several colleagues in the U.S. to look at the different aspects. There’s a consensus dimension where there’s a real openness around the table, and everyone shares their ideas in order to try to arrive at an overall vision in the end.
The idea of having votes with set points changes that approach, and it has advantages and disadvantages. I think it’s debatable, but it’s not necessarily an improvement. What I hear much more often in other places is that a lot of the discussion takes place at other times, before the meetings rather than during the meeting. When there are formal votes, people take a position and don’t want to change it, so it’s complicated.
So we’re changing the order of the discussion somewhat. It isn’t clear that it helps much, but it’s important to differentiate between the two. First, there’s the issue of the appointment and, second, the structure and the way in which decisions are made on the board.
[English]
The Chair: Thank you very much. That was an important distinction for us, how to appoint people and the power that they have, so thank you for highlighting that.
[Translation]
Senator Massicotte: Thank you for being with us, Mr. Beaudry. It’s much appreciated.
We’ll come back to the same discussion. I’m looking at the results based on my knowledge, and we can see what the history is. We have to admit that monetary policy management is fairly well controlled and that the results are quite favourable.
Yes, we can improve and make arguments. From the point of view of the argument on positions, the part where I could see a better direction is formality. In other words, as we know, board members are often appointed by the Minister of Finance. He has a joint role with the Prime Minister’s Office, but it’s very clear. Even the legislation is clear and states that the authority of the board of directors has everything to do with the administration of the box as such. The board has no direct role in monetary policy. Perhaps we should look into this.
When monetary policy is decided, the Minister of Finance is very involved. As for the board, I think it’s the governor who gets involved and appoints the people. I haven’t seen the Minister of Finance get involved in this discussion. This committee is really very important and its authority has been much greater in the past 20 years, in my experience.
Is there anything we can do? Should we be more formal, make the process more modern or give more power? Should people be appointed through a less partisan or personal process?
Mr. Beaudry: Again, it comes back to this: can we rethink how board members are appointed? I think that being a little more transparent would be a good thing; it would be important to have that dimension, to ensure that we represent the various ideas across Canada and that the process is non-partisan.
My impression over the years... I’ve been on the board more recently, but I’ve had interactions with them at various times in the past. I have to admit that the partisan side isn’t very strong; in my experience, it’s not huge. There’s a lot of respect. We’ll have to be careful in the future not to have governments exploiting the situation.
In the past, whether it’s one government or another, it hasn’t really been a partisan hold, but with the polarization we’re seeing around the world, we still need to have more robust institutions when we look to the future. We need to find something that will prevent us from having this problem; I think that would be important. So I think it makes a lot of sense to find different and broader ways of appointing board members.
[English]
Senator Varone: Thank you, professor, for being here. We heard a lot of testimony with respect to single mandates, dual mandates and central banks having certain tools in their tool box. Examples were given where it has been successful, such as Australia and the U.S.
Are there examples where too many tools in the tool box for central banks have caused adverse effects to economies of countries in that they had way too wide of a berth of tools to use and, consequently, went off the guardrails, so to speak? Are there any examples in the world where central banks had that issue?
Mr. Beaudry: We would want to break that down into two aspects, as you mentioned.
One is mandates versus tools. The issue is if we get into dual mandates versus a single mandate, that is one aspect. That is not a tool; that is a direction.
My impression is, especially over this period and what we saw — and I think it has been the communication for somewhere like the Bank of Canada — before this, I was maybe more open to the idea of dual mandates and how it had different strengths and weaknesses, but that is after 30 years when we didn’t have big supply shocks in the order of magnitude that we had recently. With that, you’re playing around, and there is flexibility.
When you really get hit by supply shocks, the idea of having a single mandate becomes a communication tool that is so much easier. What we’re seeing right now with respect to two countries is this: In Australia, we’re seeing it’s harder to bring the inflation back down. In the U.S., there is discussion right now about how dual mandates are playing in those last miles. I think it makes communication harder in those, and in the countries that have a single mandate, we are seeing the benefits. Now, again, these are marginal benefits. The other countries that have wider mandates usually say their primary mandate is still inflation, so it’s not that far away.
Then there are tools. Here, I will get into tools, and it’s very important to think of tools, including my own tool, which I think there must be much more questions around. But this is not so much one country versus another; we saw a lot of countries. It is on quantitative easing and understanding how that, as a tool, has been used. It has real implications when it’s used. A lot of the losses, those come back to the government, so it is an aspect that feeds back. It has a communication difficulty with respect to people understanding. I think that aspect of using quantitative easing should be put back into question. I’m not sure that for a small, open economy like Canada’s there is as much to gain with that. That is an aspect where having that tool, and maybe all that flexibility, has as many disadvantages as advantages. That’s one of the aspects, in thinking about the extended tools, that is worth putting into question.
Again, one thing that is difficult to differentiate is so many central banks did similar things at similar times. It is hard to get a lot of mileage out of figuring out how much one affected differently, because a lot of central banks move in a very similar way.
I think, yes, asking about certain tools and, in particular, my view is we should be asking more questions about quantitative easing as a tool and how we would want to frame it a bit better, making clear the role of its interaction with the Department of Finance, because it has direct implications on the budgetary position of the government.
Senator Varone: I am not sure I understand fully; I’m getting there.
The Chair: It would be helpful, because I’m really surprised to hear that comment. It’s very interesting on QE, and that you might want to work more in concert with the Department of Finance. Obviously, that has implications. What are you suggesting in terms of that relationship?
Mr. Beaudry: To me, the aspect is noticing that QE is a very different tool than the standard interest rate tool. We have an interest rate tool, and you can use that by itself.
Then you have QE as an additional aspect, and already we have an interaction in the way it works. In this case, you decide on QE, but then you ask the Minister of Finance: Are you going to give the indemnity to the bank? What kind of indemnity are you doing? So it is already a mix, which is different than the interest rate policy. The interest rate policy is the key aspect. That independence has to be there.
Right now, we already have a bit of a mix within QE. I just think that there, the governance has to be a lot clearer.
Now, what’s not often understood by the public, and maybe this is kind of reflecting, is that really, the big part of QE is changing the maturity structure of government debt. People think about it as printing money and all that. That’s an old view; that’s not how it’s done these days. If you were printing money, you would be putting out a liability that doesn’t pay interest. The difference with QE and how it is currently done in most countries is you put out a liability that pays the same interest as treasury bills. So you’re buying long government bonds and putting out something a little bit different, but which is very close to putting out treasury bills. That’s changing the maturity structure of government debt. Usually, we think about that as something that is the responsibility of the Ministry of Finance: deciding what kind of maturity structure it wants in its debt.
When the Bank of Canada goes around and the government is doing something about its debt structure — for example, in the early parts of the pandemic, it was borrowing a lot, going very long and telling people, “No problem, we’re going very long and kind of borrowing long.” The Bank of Canada was going back and buying those and bringing them back short. So the net position of the government was actually on the short term, not the long term. That is a mix that’s very different than the interest rate. So you have to understand that that interacts. So understanding and getting a better governance of QE is a very important thing. I’ll leave it there.
The Chair: That’s very, very helpful. That’s great.
Senator Yussuff: Thank you, chair. And thank you, professor, for being here again. I’ll follow up on the QE. The two examples we’ve had where QE has been very instrumental in crises we were dealing with were 2008 and the pandemic. In both occasions, I think many would argue that it was very successful. Of course, to manage the crises we were dealing with, it brought stability to the market, but it also brought stability in the context of how we were reassuring Canadians that we were not going to let the economy fall off a cliff.
Are those examples not worth deconstructing to get Canadians to better appreciate how it was used and how effective it has been in trying to deal with the crises that were in front of us? It was a tool that the government and the bank utilized in a very effective way to help us deal with the challenges that were before us.
Mr. Beaudry: Again, here I think we really want to divide between two things: There are liquidity provisions and there’s QE. And you can always put them all under QE, but I really think, in terms of discussion, what’s very important is that the central bank has to help with liquidity provision. And you’re saying that in the crisis part, this is the market functioning in different parts. And even at the Bank of Canada in that early period, especially during the dash for cash, it was said that this is not QE but the market functioning operations. Market functioning operations can be done in different ways to kind of undo themselves quite quickly. Many times, it really is not so much taking out long-duration bonds; it’s just taking out different things and putting liquidity into the system for a short amount of time. That’s very important.
And this is coming back to the governance question. I think the Bank of Canada should have a lot of independence. That’s been very successful; that’s been great. That’s market functioning. That’s liquidity provision.
With respect to QE as a policy of trying to change the debt structure in a way that affects interest rates in the long term, it is a lot less certain whether, in a small economy, it’s very effective, and how it interacts with the government is very different. So I do think you really want to divide those two things up. Really, liquidity provisions are very different from a general QE type of thing. So when I was bringing up questions about QE, I was really thinking about that part, which is different than in a liquidity crisis. Yes, one of the big things about a central bank is to provide liquidity against good collateral during a liquidity crisis, and that should be stayed. Again, all the governance around these things is really important, and I’m happy to discuss that more.
Senator Yussuff: Along similar lines, as we’re talking about mandates, the 2021 renewal policy framework agreement included language seeking maximum sustainable employment. What would you say was the usefulness of adding that language in the last renewal in terms of impact between 2021 and 2022 on employment in the country? Do you think the bank was very conscious of that recognition of its mandate and how it was managing this current crisis we’re now at the tail end of?
Mr. Beaudry: I think how it was thought of at that point in time really didn’t apply in this type of period. What was really kind of thought was this: Suppose you get out of a long recession — and that was maybe more the view kind of coming into the pandemic — you’d go out from a long recession. Inflation had been below target for a long time. You’re coming out. Inflation is getting back to target, so from below. And then the idea was this: How fast would you decide to increase rates coming out of something that looked like that?
So you have to think about it as very much looking back. So it would be much closer to looking forward if that type of wording might kind of come into play sometime in the future, kind of thinking that maybe now we sort of pick up. Suppose we’re hit by tariffs or what have you, and the Canadian economy were hit down and then needed to kind of come up. Then that kind of wording, I think, would play an important role.
I don’t think it played a very important role in the recent episode because the conditions were really not there. It wasn’t for those types of conditions. It was really for the idea of when you’re coming out of a recession with low inflation. How long do you wait before you start increasing and trying to check whether the economy can kind of fully recuperate from that recession before the interest rates are increased? So we really didn’t have that episode because inflation started, so everything was reversed. So it really didn’t play a big role.
Senator Martin: Thank you for being here again, Mr. Beaudry. My questions relate to productivity and the importance of coordination between the federal government and the Bank of Canada. We’ve heard previous witnesses argue that relying solely on the Bank of Canada to adjust interest rates is too costly in both economic and social terms. Do you agree with this? Also, how can the federal government and the Bank of Canada better coordinate fiscal and monetary policies to enhance productivity, which is an issue for Canada?
Mr. Beaudry: Certainly productivity is a huge issue for Canada. So we could go on about this, and it’s something I’m very interested in. At the same time, I think it’s not an issue that should be kind of thought —
The Bank of Canada, that’s not the type of tools it has. That is exactly why you want a mandate that is very much clear and respectful of what can be done by monetary policy. And a large part of wanting an inflation target regime is to say that this is the best that monetary policy can do: give stable prices such that the governments and the private sector can then go out and do their things without being confused by prices moving all over the place. They can predict everything.
But that doesn’t make it so that the Bank of Canada is going to be, by itself, increasing productivity or anything. It’s really the private sector supported by the government that does that.
You have the Bank of Canada kind of always coming back. Fundamentally, a central bank is about nominal things in the economy. It’s about the price level in the long run. It’s about keeping that so that people have an environment where they can have confidence in what their purchasing power will be if they have saved and so on. That’s what you’re trying to make.
The other aspect is this: Monetary policy doesn’t have the strength to affect productivity directly.
Senator Martin: Okay. So that’s very clear regarding the role that the bank has to take, and that’s separate from the issue of productivity. I’m quite curious to hear you speak more about your comments on productivity. Is that something I can ask you to share — just some key points that you wish to share at this time?
Mr. Beaudry: My key point is that we’ve just not had it up as a major agenda in Canada enough. I think we need to have an innovation ecosystem in Canada where we recognize, for almost all policies that are brought up, what does it mean for productivity? Will this become a more innovative country? Will we be adopting things? If we want to stay up in a world where it’s competing in different things, we really need to have that kind of mindset generally. I’m not saying that’s not the Bank of Canada’s role, but it’s the role of all the governments, and all policies should have that focus.
You know, we have to do a huge job to help our most innovative firms scale up, develop and stay in Canada. We have all sorts of great things that start up. We have incubators. We have all sorts of things when it comes to scaling up. And it’s not only Canada. We’re facing a big challenge, and it goes to the U.S. We’re a small fish beside the U.S. It’s all those aspects. So I could go on, but this wasn’t the meeting for today. I just threw out a few ideas there.
Senator Martin: Since you mentioned it, I was curious.
The Chair: Could I have you elaborate a little bit? You touched on voting and regional representation. In our testimony, we’ve heard the governor is all-powerful. What we see from the Fed is the publication of actual verbatim notes. We do not have that process here. You have seen this all from the inside on those points. Would you like to elaborate, particularly on the publication of verbatim notes?
Mr. Beaudry: I’ll repeat a bit of what I said earlier.
When I talk to my colleagues and friends in the U.S., they ask about what has changed with the aspect of verbatim notes. The real conversations have all moved back to back doors and other rooms. That’s what happens. That’s one of the difficulties. Yes, you can do that, but then it will not be an honest conversation at that point. As an example — and this is a typical case — sometimes you want to play devil’s advocate at a table like this. If it’s verbatim, I don’t know if I want to play devil’s advocate, but when you’re around a table, I’ll take this other thing and push people to really say, “Will we check out this issue?” If it’s verbatim, that’s hard to do. It gets misinterpreted. Around a table where you’re trying to find consensus, that works easily. There are costs to bringing in minutes exactly.
The Chair: That’s very much. That’s exactly what I was looking for.
Senator Gignac: Just to continue the conversation, Mr. Beaudry, what you are talking about is not about printing money but playing with maturity.
Based on your experience, could you give more information and compare the Bank of Canada with other central banks regarding the independence of the Bank of Canada from the government or dependence on QE? How does it work with other central banks? Is it the same as with the Bank of Canada or is the Bank of Canada much more dependent on government than other central banks regarding QE?
Mr. Beaudry: No, it’s really a mix. That’s an interesting question. There is a nice independence on the interest rate policy. In my experience, there is very little interference from the government on that front.
Regarding QE, most central banks that do QE have some kind of arrangement because it’s a very bizarre, in-between type of thing. If you look at the U.K., there is a second body that is a mix of government and the bank on issues of QE, and it has to be decided within that. The Fed, when it puts up these programs, has to get the backing of fiscal authorities around how much it can actually use and do through QE. It is a mixed thing that makes it special in terms of an in between.
In some sense, in Canada, we hadn’t really used QE. I want to emphasize the difference I was making before. Liquidity injections and different things happened before, but as a policy of wanting to influence the long-term rates through systematic buying of longer-term bonds and taking that duration risk on the balance sheet, that hadn’t been done in Canada, so we didn’t have a very clear governance structure around it. It was taken in during this crisis as this partway idea that the Bank of Canada would decide something and go to the government and ask about indemnity. “Will you give us an indemnity for this or that program?” I think it worked well, and I don’t think there was a lot of political interference there, but I’m not sure that’s the best type of governance we could have. That’s why thinking clearly about that going forward and, especially in this mandate renewal, clarifying that would be very useful.
[Translation]
Senator Gignac: I have another question on a completely different subject. It relates to the third part of our special study, namely, the measures used by the Bank of Canada, particularly those used to measure core inflation.
In my last few years as chief economist, I followed the Bank of Canada a lot. For 15 or 16 years, we used the famous CPIX, which excluded volatile components. In 2017, we came up with new measures.
Could you shed some light on the importance of these choices? It’s a bit of a technical question, but I sometimes get the impression that the Bank of Canada chooses this index, and sometimes other indices, and in the end, we no longer know the importance of these underlying indices in determining monetary policy.
Other central banks, such as the Bank of Sweden, exclude interest rates altogether, whereas the Bank of Canada does not. Can you tell us a little more about the importance of these indices?
Mr. Beaudry: These are very important indicators. You’re quite right to say that this makes the whole thing more complicated, because we have a number of indicators, and on the other hand, it’s a bit of a reality.
When you have a situation like this, you want to have several measures, because there’s no one perfect measure of the system. Were they all good indicators? I think they helped. You have to look at something like the median measure, for example, which by definition excludes…. We can say that there’s an issue such as interest rates, the direct effects, because it affects a few measures, but it hardly affects the median measure. We still had a clean-up of these effects. It was the same thing on the CPI-trim side: the measures were quite central at that time.
After that, when it comes to determining whether we should have a single measure, I think that if we’re honest with Canadians, we should say that we’re evaluating several measures to find out whether we’re confident that inflation is really on target or not. By having several indices, we can say that if they’re all coming back to a certain level, we’re very confident; if there are a few that are coming back and others that aren’t, we can say that we’re less confident; that’s the reality.
I think it’s useful to have several measures, even to communicate to Canadians and markets how they’re being used. Even then, the more traditional index was used and tracked; it was just another index that was talked about at different times.
[English]
The Chair: Thank you very much.
[Translation]
Senator Massicotte: I don’t know how to bring this up, but we’re talking about monetary policy.
Indeed, the central bank does much more than monetary policy. For example, it can provide financial support to a bank that’s going bankrupt, or it can manage all kinds of other things. Unlike England, where it’s very broad, in Canada we’re limited, but should we separate these topics and make a comment on what other role that the central bank should play?
I know there’s also talk about a dual mandate. If we look at the Bank of Canada, when its duties are described, they’re very broad. This gives flexibility, subject to an agreement with the Minister of Finance. Should we be stricter and separate all this — like England, for example — and say, “No, you don’t deal with that”? There are more tasks and responsibilities in other central banks. Is there something more fundamental we should be looking at?
Mr. Beaudry: First, as you said, in fact, central banks like the Bank of England do more than the Bank of Canada. It’s sort of like bringing the Office of the Superintendent of Financial Institutions into the central bank, essentially. Many central banks regulate banks at the same time.
In Canada, the role of the central bank is already more limited. However, on the support side, there’s a part of the mandate that’s different from the monetary policy part, which has to do with financial stability; I think that part should stay with the Bank of Canada. Similar to what I was saying before, providing liquidity really gives a central bank a central edge. For example, the bank can provide support in times of difficulty and when there are liquidity problems; for some firms, if there’s good collateral to take, it poses little risk.
The assessment of the Bank of Canada’s policy should be collateral. It’s a very conservative way of doing things, and we take little risk. It’s very inexpensive for a central bank to take securities that are of good value, bring them into its account, and take them out of the system when they need them. I think this should remain with the bank, because that’s part of its financial stability mandate. Perhaps we should be discussing how to renew this mandate, because we don’t have the same framework.
As far as financial stability is concerned, the mandate isn’t discussed or revised every five years. Perhaps we should think about this, but I think it works quite well.
Senator Massicotte: At the very least, the title of our report should be broadened, because we’re discussing much more than monetary policy.
Mr. Beaudry: We could take a look at this financial stability. I think it’s working quite well. You could certainly expand on that, because that’s really an important part of the Bank of Canada’s responsibilities. It’s both the monetary policy and price stability side, and the financial stability side.
Obviously, a number of these financial stability issues interact with the Office of the Superintendent of Financial Institutions, particularly when there’s a problem on the banking side, the insurance side and all those kinds of issues. I think that on the liquidity side, it’s really something that’s paramount that a central bank can do, so that should remain the responsibility of the central bank.
Senator Massicotte: Thank you.
[English]
Senator Loffreda: Professor Beaudry, thank you once again for being here.
We covered a lot of ground on communication and public trust. How can the Bank of Canada improve its communication strategies to build public trust and manage inflation expectations more effectively? I mean, that’s important for the business world, to manage those expectations. How can that communication strategy be improved?
Do you think the public fully understands the implications of monetary policy decisions on their daily lives?
You’re in the world of academia. What role does academia play in enhancing financial literacy?
Mr. Beaudry: That is a very good question. The biggest role of a central bank is to manage those expectations. I always see a central bank as basically a coordination device.
The economy could be rolling around at high inflation, medium inflation — all sorts of levels. It could be volatile. Among all those choices, what you want is to have a very simple choice, something that makes it very stable for people, as well as committing to coming back there.
Understanding that role is something that should be communicated more, but at the same time, what’s difficult about it is understanding that there is not an easy trade-off, and we’ve seen it in this particular case.
When you get big supply shocks, you want to let inflation go but not let inflation expectations go. This is the funny trade-off that you have to do. This was, really, the trade-off in 2021 in the sense that you were going to get the supply shocks. You think that, hopefully, you can get some of those. There are big things that change — oil prices and grain and all sorts of aspects — and you want to let them in and have inflation go up. But you want people to understand that, yes, we’re not letting inflation go up on average forever; we’re going to let it go up for a little bit, and then it will come back down to 2%. That is a complicated message to get to people and to get them to understand.
We have to do a better job of that. I think universities — and teaching, in general — have to play a better role on that, but it is a difficult concept.
In particular, having 30 years before that where that was almost taken for granted, there was almost a backward step. That’s what you would hope for, kind of: that no one talks about the Bank of Canada. We had 30 years when most people didn’t have to worry. It was done in the background, and they didn’t even think that the bank was doing things to make this happen. So we forgot how to think about it.
We have to educate and re-educate that the bank can’t do too much. This is the aspect that people want it to be able to do, as if we could have avoided this inflation period at very low costs. I think that was an impossibility. That wasn’t a choice. We could have, maybe, had lower inflation at very high costs in terms of really squeezing the economy much harder, and people wouldn’t have been happy with that.
When you get these bad shocks, there is not an easy choice. Keeping those expectations is really central, and that has to be communicated better.
Senator Loffreda: Thank you.
The Chair: Excellent. Thank you.
Senator Yussuff: I’ll follow up along the same lines.
In this current period, dealing with inflation and the bank using the number one tool it has, which is basically interest rates, Canadians were very much, of course, waking up every morning wondering when the rate is going to go down, because their economic reality has so much to do with their household expenses, and the list goes on.
In the political arena, some of our premiers also weighed in on this question: Is the bank taking too long to bring rates down?
Communication is really a critical element, because information moves much faster now. We have other ways for people to find things out. Shouldn’t there be a clearer recognition of that from the bank?
We also have regions in the country that are more sensitive to certain things with respect to the bank in terms of its obligation and responsibility. Maybe in the mandate, it should be clear as to the need for dialogue and communication, because, writ large, Canadians do care about what the bank does. They appreciate its good work. They also appreciate the challenges that they face, but, equally, they want to know what it means for their bottom line in managing their household budget.
That’s the reality, and the bank has to figure out how we can help people understand and appreciate the limited but important role it has in doing its work.
Mr. Beaudry: I completely agree that improved communication is always a good thing. The Bank of Canada is there for Canadians. It’s there to try to help Canadians, and it has this tension. It has a limited number of tools. The tools it does hold do have direct effects on people. It recognizes that has to be communicated.
Within that, it doesn’t have much choice about how it’s going to balance a lot of these other aspects — how, for example, it affects regions differently and how it affects people within the same region very differently. We know very much that people with variable mortgages were hit much more than others. That was just the reality.
At the same time, it has to be understood that in those cases, fiscal policy can come in and redistribute if we’re not happy. The governments have a lot more tools with respect to redistribution.
The Bank of Canada does not have good redistribution tools. If you really have only one tool, you can get one objective right. Again, that is why the inflation objective is the tool that really is in the hands of the Bank of Canada.
Conditional on that — and it has to take into account how it’s affecting Canadians and how that feeds back — I think it has to be better understood that governments could be unhappy overall with where interest rates are, but a lot of the redistribution within has to be done by governments at that point. There is no way that monetary policy is going to be attacking the redistribution part of monetary policy, which is very unfair in how it affects different households.
You would much prefer something that would affect everyone the same way, but that is not the truth.
Senator Varone: I’m going to go back to an offset of the original question I asked and deal with the answer that you gave. In testimony before you, I got an understanding that we have several mandates to consider. Obviously, inflation is the first mandate, with employment being a second mandate. There was previous testimony that said money supply was a mandate issue.
Then you divided the subsets. There are now tools. Quantitative easing is a tool. Liquidity is a tool.
Can you elaborate on those baskets for me and allow me to understand the difference between a mandate and a tool?
Mr. Beaudry: Yes. To me, really, the mandate is thinking that you have an objective, and this is where you can be judged. The accountability is very much around that. That’s your mandate, saying, “Did you get inflation at 2%?” How far did you get it? How far did it go? How fast should we think it comes back?
When we think about a flexible inflation targeting mandate, it’s not only 2%, but usually you also have associated with that a recognition that it might deviate from 2% but come back at a certain speed, and within, let’s say, two years, you should be back close to your mandate. You can really evaluate, and that’s where you’re accountable.
The tools are the things you are given to try to achieve a particular goal. Again, here, you can expand that and have the mandate and have different things in it, but you usually don’t think of QE as an objective in itself. It’s not as if we think QE, in the absence of everything else, is an important part we should be thinking of as an objective, or that we just want QE to do something.
We want to think about inflation. We might want to think about unemployment. We might want to think about the different aspects of the distribution of income. Then you would have all those mandates, but do we have good tools that can help those? Maybe not. That’s what I come back to. We don’t have a lot of tools, and that is why you would want to have more restrictions. The mandate is about your objective and what you would be accountable for. The tools are what you’re given to try to address and get to those targets.
Senator Varone: Thank you.
Senator Gignac: Your remark on financial stability is very interesting. By itself, it would be another study, as you pointed out. I agree. I want to get some additional thoughts from you.
Financial stability is a mandate of the Bank of Canada, but macroprudential mergers — many of them controlled by the Office of the Superintendent of Financial Institutions, or OSFI, for example. In the U.K., it is different because the regulator is controlled by the central bank, and it is probably the reason why Mark Carney has gone there from the Bank of Canada. He mentioned publicly it is good to have both controls.
What are your thoughts on that? Is it something that, down the road, should have a study to consider if it’s working well or not that OSFI is different? I remember on macroprudential mergers, OSFI lagged before giving new instructions regarding variable rates and so on, and now a lot of Canadians are screwed from choosing floating rates when the interest rates went up. Do you have a few thoughts on that?
Mr. Beaudry: It’s a very good thing. Macroprudential is something in Canada that is kind of governed in a very bizarre combination. The Bank of Canada does not have control of that. Actually, OSFI, because it doesn’t have the same independence either, it kind of has control and kind of doesn’t. It’s the body that comes out with the actual regulations and so on. Usually, macroprudential is decided in a multi-unit part in the collaboration system in Ottawa, which is really the Minister of Finance, the Bank of Canada, OSFI and CDIC. They all sit together.
In my first few years, I was overseeing the financial stability aspect of the bank. I was on those committees. It is this joint part where macroprudential is done by this group and committee aspect. It then goes back to OSFI for implementation. It’s not like OSFI has the independence like the bank does, to just say, “This is the aspect.” There is a lot of collaboration in different things. It does mean the accountability by the end of macroprudential is not so clear in Canada because it has that multi-jurisdictional part. That could be clarified. There have been multiple discussions about whether it lands properly. There are good questions there.
Senator Gignac: I asked you that because some folks asked if we are more supply shocked in the coming years, contrary to the last three decades, macroprudential measures are a much more efficient tool in some cases than just interest rates. If this macroprudential thing is a lack of clarity about who controls it — with no independence from the finance minister — at the end of the day, the central bank has a tool they do not really control. Do you agree we have to revisit that aspect in another study?
Mr. Beaudry: Yes, I do think the governance of macroprudential is something to think more seriously. Right now, to be clear, my impression is that it comes back to the Minister of Finance, the way it really runs in Canada at this point, because they directly oversee OSFI. But it is really done in practice as this collaboration among the whole set. It does mean that the accountability on that front is not always clear.
Yes, I do think it’s a worthwhile issue to bring up. I do think it might be used more, especially given that in Canada, the aspect of housing is so important, is a big part of people’s assets and plays a big role in figuring out what policies make sense. The system isn’t working badly, but it could be clarified there with respect to getting better governance.
Senator Gignac: Thank you.
The Chair: Thank you so much, Dr. Beaudry. This has been very helpful. We’re doing an interim report and then a longer report in the new year, and we have a fair amount of flexibility. Your comments have been very helpful. We may come back to you on that one as we work on our recommendations for that. Dr. Paul Beaudry is a Professor and Canada Research Chair at the Vancouver School of Economics, University of British Columbia, but he has been here today sharing his insights as a former deputy governor of the Bank of Canada from 2019 to 2023. We truly appreciate that. Thank you so much for your participation.
Mr. Beaudry: My pleasure. Thank you.
The Chair: That’s wonderful.
Ladies and gentlemen, we will suspend before briefly going in camera to take a look at our report. Thank you very much.
(The committee continued in camera.)