THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Wednesday, May 6, 2026
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 4:15 p.m. [ET] to examine and report on matters relating to banking, commerce and the economy generally.
Senator Clément Gignac (Chair) in the chair.
[Translation]
The Chair: Honourable senators, welcome. I also wish to welcome those watching us today online at sencanada.ca. My name is Clément Gignac, I am a senator from Quebec and chair of the Standing Senate Committee on Banking, Commerce and the Economy. Before proceeding, I’d like to ask my colleagues to please introduce themselves, starting with our deputy chair.
[English]
Senator Varone: Senator Toni Varone, Ontario.
Senator Pupatello: Senator Sandra Pupatello, Ontario.
Senator Fridhandler: Daryl Fridhandler, Alberta.
Senator Loffreda: Welcome. Senator Tony Loffreda, Montreal, Quebec.
Senator Yussuff: Senator Yussuff, Ontario.
Senator Cardozo: Andrew Cardozo, Ontario.
Senator McBean: Marnie McBean, Ontario.
[Translation]
Senator Saint-Germain: Raymonde Saint-Germain, Quebec.
[English]
Senator Manning: Fabian Manning, Newfoundland and Labrador.
Senator C. Deacon: Colin Deacon, Nova Scotia.
Senator Wallin: Pamela Wallin, Saskatchewan.
[Translation]
The Chair: It’s a real pleasure to welcome Tiff Macklem, Governor of the Bank of Canada, and Carolyn Rogers, Senior Deputy Governor. Their appearance before our committee underscores the importance of institutional dialogue between the Parliament of Canada and the Bank of Canada, especially in the current climate of economic uncertainty. So we are very grateful to you. We know you have a busy schedule, but it is a tradition to welcome you and hear from you on monetary policy. On behalf of all committee members, I thank you for accepting our invitation and for maintaining this commitment to transparency and accountability in explaining the Bank of Canada’s decisions and the principles that guide your actions.
Governor, I’d now like to invite you to deliver your opening remarks, which will be followed by a question period. Welcome to you both.
Tiff Macklem, Governor, Bank of Canada: Thank you, chair. Good afternoon, everyone. I’m happy to be here with the senior deputy governor to discuss our Monetary Policy Report and the decision we made last week.
[English]
Last Wednesday, the Governing Council maintained the policy interest rate at 2.25%. We had three main messages.
First, Canada is being buffeted by global events and geopolitical uncertainties. But our economy is growing, and it is expected to continue to grow.
Second, after more than a year with inflation close to the 2% target, higher global energy prices are pushing inflation up. The surge in gasoline prices combined with still-elevated food price inflation is squeezing more Canadians.
Third, monetary policy is focused on ensuring the jump in energy prices does not turn into persistent inflation. We are helping the economy adjust to global headwinds while keeping inflation low and stable over time.
Let me expand on the economic outlook, the risks and the implications for monetary policy.
[Translation]
Since our last forecast in January, the war in the Middle East has led to a sharp rise in global energy prices. It has increased volatility in financial markets and disrupted shipments of fertilizers and other commodities. This situation has dimmed the outlook for global growth and pushed up inflation. In Canada, growth appears to have resumed after a contraction at the end of 2025.
Consumer spending and government spending are contributing to growth, while U.S. tariffs and trade uncertainty are weighing on exports and business investment. The labour market is slack, and the unemployment rate remains in the 6.5% to 7% range. This rate reflects weak hiring and a decline in the number of people looking for work.
In its forecast, the Bank of Canada projects economic growth of 1.2% in 2026, 1.6% in 2027, and 1.7% in 2028. This growth will follow the gradual recovery in growth, exports and business investment.
Before the war broke out, inflation was expected to remain close to the 2% target. However, due to much higher prices at the pump, inflation is rising. Inflation, as measured by the Consumer Price Index, rose from 1.8% in February to 2.4% in March. So far, there are few signs that rising oil prices have had a broader impact on the prices of other goods and services. However, it is too early to tell whether such effects will materialize. We will be monitoring the situation closely.
Based on recent market expectations regarding oil prices, inflation is expected to reach around 3% in April and return to the target by early next year.
[English]
The Bank of Canada is committed to keeping inflation close to the 2% target over time.
The monetary policy needed to achieve this will depend importantly on what happens with the Canada-U.S.-Mexico trade agreement, the conflict in the Middle East and the impacts of U.S. tariffs and energy prices on our economy.
The Governing Council agreed to look through the war’s immediate impact on inflation, but if energy prices stay high, we will not let their effects become persistent inflation.
Our baseline forecast assumes oil prices will come down and that U.S. tariffs will remain at the current levels. If this holds true and the economy evolves broadly in line with the base-case projection, changes in the policy rate can be expected to be small.
However, uncertainty is unusually elevated, and there are many possible outcomes. Monetary policy may need to be nimble. If the United States imposes significant new trade restrictions on Canada, we may need to cut the policy rate further to support economic growth.
Alternatively, if oil prices continue to increase, and particularly if they remain elevated, the risk that higher energy prices become ongoing generalized inflation increases. If this starts to happen, there may be a need for consecutive increases in the policy rate.
Of course, these are not the only possible outcomes. As the outlook evolves, we stand ready to respond as needed.
[Translation]
Mr. Chair, we are happy to answer the committee’s questions.
The Chair: Thank you, Mr. Macklem. Colleagues, we have six minutes for the first round. There will be a second round later on.
[English]
Senator Varone: Welcome, governors. The conflict in the Middle East and the rise in the price of gas — we tend to think it is far away, but it has changed my spending habits. It has changed my personal vacation and purchasing habits in terms of where I wish to purchase goods. Even of late, I have had a surcharge on my Amazon account for delivery. It is real. Even now, as we buy in our hospitality business, we are seeing the surcharges for delivery being quasi-permanent.
At what point does it break? I take your comments to heart that it is something that you monitor and that you won’t let it become a permanent thing. But things that have happened haphazardly in the past have a tendency of becoming permanent. When habits are changing, the world is different.
Guide us. Tell us where you think that breaking point is from temporary to permanent.
Mr. Macklem: I think that your guidance was pretty good there. I have a couple of comments.
First of all, we know how gasoline prices impact Canadians, and that is on the back of already high food price inflation, which has been running around 4% for a number of months now. These are necessities. People need them.
As you pointed out, these price increases largely reflect global developments. What we’re seeing, once again, is that we’re all connected. It is a global economy. We’re very connected. Yes, it is far away, but events far away affect global prices, which are impacting everybody in Canada.
The best thing that could happen here is that what is causing these price increases could go away at the source, but, of course, that is not something that any of us have any control over.
What can the Bank of Canada control? We can ensure that these price increases do not spread to other goods and services, which then spreads to other goods and services and becomes generalized ongoing inflation.
Then the question is: When is that? It isn’t really something that we can put on a calendar. There isn’t a timeline. It is going to depend upon conditions.
A key element of this is what happens to oil prices themselves. If they go up and they come back down, inflation will go up and come back down. But if they go up and stay up, the risk that it starts to spread to other things starts to go up. So we’re going to need to see what happens with oil prices.
To be frank, every day there are new developments. Over the last 24 hours, there has been speculation there may be a peace agreement. Oil prices are down. I don’t know what is going to happen tomorrow. We’ll see. We need to see how this evolves.
Then we need to see how it spreads. Perhaps what I could do here is to give you a sense of the things we would look at to know when it is spreading.
Obviously, our target is for total consumer price index, or CPI, inflation. There is a good reason for that as it reflects the basket that people consume. But core inflation strips out the volatile components. So far, total inflation has gone up, but the core hasn’t really moved. If you start to see core inflation, which strips out the volatile components, go up, that suggests that things are broadening. So it is not the direct one-off effect of higher oil prices; it is other goods and services.
We look at the whole distribution of price changes. In the Monetary Policy Report, there is a chart of the percentage of CPI components that are rising faster than 3%. Recently, that actually has been coming down. If you start to see the percentage of CPI components that are rising more than 3% going up, that is a sense that it is spreading.
Those are some of the things we would look at. If we start to see signs of spreading, yes, we’re going to be getting more concerned.
Senator Varone: I will ask a question. You can think about it, and in the second round you may wish to answer it. Living in Canada’s largest urban centre in Toronto, it is becoming more and more prevalent that every time I go to the hairdresser, they ask if I will pay with cash or credit. If I pay with cash, the till stays open, so to speak; it is not being reported. If I’m calling for a painter to come and paint my basement, the question is: Are you paying with cash or by cheque? If it is with cash, they can come tomorrow. If it is by cheque, I have to wait three weeks before they free up some time.
At what point in time are you concerned about the proliferation of the underground market in the economy and how big it is actually getting and affecting everything we do in terms of trying to live our lives in Canada?
Mr. Macklem: We better come back to it. I do not think that is possible to answer in one minute.
The Chair: We will return to that in the second round. Stay tuned. We will have the answer in the second round.
Senator Fridhandler: Welcome. I think that I’m moving off monetary policy, and I get in trouble when I get an answer that it’s not the Bank of Canada’s responsibility.
Recently, in your capacity as a member of the risk committee of the Financial Stability Board, or FSB, you commented on your concerns about the private credit market. You suggested that, obviously, it is not suitable for everybody, but you also went on to suggest that additional guardrails might be required.
I am wondering whether you believe that the regulatory regime that the securities commissions operate in is insufficient to deal with this issue. What might be the impact otherwise?
Mr. Macklem: Let me explain the comment that you referred to.
First of all, private credit has a number of advantages. It provides more tailored solutions. It provides more competition and broadening access to credit. It provides longer-term commitments, which are good for borrowers in general. But there are some vulnerabilities.
I’m talking more globally. This is mostly in the U.S., the U.K. and Europe. There are some in Canada, which I can come back to. Globally, it’s been growing rapidly. It’s untested in a downturn, so there are some concerns.
One concern we’re seeing is that while it’s well suited for long-term investors, like pension funds or insurance companies, that have very long-term liabilities and can make long-term commitments, it’s less well suited for retail investors who might want to withdraw their money more quickly. You’re seeing some of that play out right now.
Retail investors are not a big part of private credit, but that has been growing in the last couple of years. That’s a little bit worrisome because individuals may want to withdraw their money, and you’re seeing some problems now where they’re discovering that there are limits on the speed of redemptions.
When I said that we might need some guardrails, I was referring to the fact that while this instrument has a number of advantages, it is not well suited for many retail investors. There are existing rules. When an investment adviser is selling something to somebody, they have to make sure that it is suitable. We may want to make sure that that degree of oversight is happening.
Globally, yes, we need to think about whether the guardrails in place are adequate. Does something more need to be done? I will say that as the word gets out about this episode right now, where people are discovering that they can’t always redeem as fast as they want, that might be somewhat helpful in making sure people fully appreciate all of the fine print and understand what they’re getting into.
Senator Fridhandler: To close the loop, it’s very clear that there are a number of private lenders in the Canadian marketplace that have closed off redemption. It trickles through to their borrowers, whom they squeeze and can’t accommodate, and on through the system. We may get another real estate catastrophe if there is too much of this credit in the marketplace.
Mr. Macklem: Private credit is certainly present in Canada. It hasn’t grown as rapidly in Canada as it has in some other places, but it is certainly something to keep an eye on.
Senator Fridhandler: Let me shift again off monetary policy and ask for an update on where you are in your work on stablecoins. We saw it as being quite important to keep us in the global marketplace by protecting our currency and our position in the global marketplace. It’s anticipated that, as I believe the reports said, the regulatory regime will not be in place until 2027. Are we speeding it up? How are we doing?
Carolyn Rogers, Senior Deputy Governor, Bank of Canada: We are working closely with the Department of Finance on the regulations. As you say, it is a bit of a fast‑shifting regime. In part, one of the motivators for bringing a Canadian-based stablecoin regime into Canada was to make sure that, if there is a growing demand for stablecoins, there is an option for a Canadian-backed stablecoin. To make sure that the regime is competitive and does allow the level of innovation and stuff we want, we’re also watching regimes that are still under development in other jurisdictions, in particular the U.S.
The process of designing the regulations is well under way right now. As the entity that will ultimately supervise this regime, we’re working really closely. Our job is to make sure that we can implement the rules, and we’ll be able to supervise stablecoin issuers and purchasers.
Senator Fridhandler: Will that come in early 2027?
Ms. Rogers: I think so. It’s ambitious, I would say. I would be more comfortable with mid- or maybe late 2027, but we’re going as fast as we can.
Senator Loffreda: Welcome to our committee, Governor Macklem and Ms. Rogers.
We are currently studying access to capital for small- and medium-sized enterprises, or SMEs. Governor Macklem, the Competition Bureau recently launched a market study examining financing conditions for small- and medium-sized enterprises in Canada. One of the objectives is to determine whether increased competition in the lending market could improve access to capital, productivity and innovation for SMEs. Has the Bank of Canada been consulted as part of this work?
More broadly, how do you view the balance between maintaining a prudent, resilient financial system, while also ensuring that sufficient capital flows to productive sectors of the economy, particularly SMEs that are critical for Canada’s long‑term growth, as you know?
Ms. Rogers: I couldn’t say for absolute certain if we’ve been formally consulted by the Competition Bureau, but we work closely with them. Our researchers work together. I would be very surprised if they haven’t at least tapped into our research.
You are also aware, Senator Loffreda, that we have the various bodies that deal with the financial sector. We have the Financial Institutions Supervisory Committee, known as FISC, and the Senior Advisory Committee, or SAC. This is a topic we talk about in those forums.
In my own view, I come at this from my background in bank regulation, so I always get a little nervous when we use the regulatory regime to incent competition. I don’t think that’s the first place that you should go. But I do think that it is worth looking at the regulations and, in particular, at the capital requirements and whether they remain fit for purpose.
The first objective of capital requirements is not to steer capital; it’s to create a buffer for losses. So that’s the most important thing to keep in mind. But if we are inadvertently steering capital into real estate, for example, at the expense of small business, it would be helpful to take a deeper look at that, which I know is under way. I know that the Office of the Superintendent of Financial Institutions, or OSFI, is working with the direction that the broader objective is heading in. So we’ll see.
Senator Loffreda: Thank you for that.
Moving on to the C.D. Howe Institute, they suggested that current prudential frameworks may disproportionately affect what is often referred to as the missing-middle businesses that are too large for traditional retail lending yet too small to efficiently access public capital markets. They argue that conservative capital assumptions tied to SME lending may at times exceed the actual underlying risk.
Do you share these concerns? Is the Bank of Canada working with OSFI to assess adjustments to capital treatment for SME lending? Maybe you can further elaborate on what you started. SME lending could support greater economic growth and business investment without compromising financial stability.
You were talking about steering into real estate, but I know a lot of the banks, from experience, try to monitor what percentage of real estate lending they have on their books. Do you have any comments on that?
Ms. Rogers: What I remember about lending is that middle businesses often don’t have a lot of collateral. We’re pretty collateral-based lenders when it comes to business lending. What happens is that it often forces particularly independent business owners who want to borrow money to use their personal assets, typically their home, as collateral. What is ultimately a business loan ends up on the books of the bank looking like a real estate loan. You have to look a little deeper to understand what business financing is and what real estate financing is.
My answer to the second question, senator, would probably come back to the same thing I said in the first question, which is that I’m always a bit nervous when we look at regulation as a tool to drive anything other than safety and soundness. That needs to be its first and main objective.
Now, asking whether you have the balance right between safety and soundness and innovation and competition is fair, but using the regime to drive competition, to me, is where you step over.
Senator Loffreda: I have heard so many things, and I hear it from every side. How much of bank lending is determined by the Bank of Canada Act and by OSFI itself? How much monitoring does OSFI get into on a bank’s strategy?
When we look at SME lending in Canada, it’s way below the Organisation for Economic Co-operation and Development, or OECD. Is that anything that OSFI can monitor or get into or dive into? Or is it strictly bank strategy across the board?
Ms. Rogers: Are you talking about where banks choose to lend, their mix?
Senator Loffreda: Yes, the percentage as to what sectors they lend to.
Ms. Rogers: Again, I would come back to that it’s not the intention of the regulatory regime to steer lending in any one direction.
Senator Loffreda: Do the banks decide for themselves what they get into?
Ms. Rogers: Yes. It’s the cost of capital, market opportunity and strategy. It’s all those things.
Senator Loffreda: It’s not OSFI?
Ms. Rogers: No.
Mr. Macklem: If OSFI was getting concerned that a bank’s loans were too concentrated in one area, they might say, “Well, you need to diversify.” But they’re not saying, “You need to loan more here or less there.” That’s not their job. Their job, as Carolyn just said, is a prudential function. It’s soundness. They’re trying to protect from financial instability.
Senator Loffreda: So the strategy is strictly determined by the bank itself and —
The Chair: Thank you, senator.
[Translation]
We’ll have the opportunity to welcome Peter Routledge, from the Office of the Superintendent of Financial Institutions, in the coming weeks. We generally like to check in with him regularly, just as we like to do with you, governor, and with you, senior deputy governor.
[English]
Senator Manning: Welcome to our guests. Governor, there are notable diversions between the real GDP growth projections in the government’s spring economic update and the Bank of Canada’s own internal projections in the April Monetary Policy Report. The spring economic update projects economic growth to be around 1.1% in 2026, but yours is slightly different. In 2027, you project 1.6% growth, while the spring economic update projects 1.9%.
My question is: Given that both documents are being used to guide Canada’s economic and fiscal strategy in a time of high uncertainty, how does the Bank of Canada reconcile its own assessment with the broader market consensus reflected in the government’s update?
Mr. Macklem: First of all, I’d stress that, yes, there are some differences. I think they are at 1.1% for this year. We are 1.2%, so we’re a bit stronger for this year. Our forecast is that the economy picks up a little more slowly than theirs. Theirs is a little stronger in the forward years. But the pattern is pretty much the same.
Look, these are forecasts. We would be the first to admit that there is a fair amount of uncertainty about those forecasts. In fact, the differences probably understate the degree of uncertainty around it.
These forecasts were done by different people. They were also done at different times. The spring economic update uses an average of private sector forecasts that were probably done a good month before the spring economic update came out. We were updating our forecast pretty much up to when we published it, so we had the benefit of slightly more recent data. That’s probably why we’re a little bit stronger for this year.
As I said, there is quite a bit of uncertainty about all of these forecasts. Broadly speaking, they all have the economy growing moderately. They all have growth largely being driven by consumption in government spending. They have weak business investment in exports with some pickup in exports and investment going forward. How optimistic you are about that pickup in exports and investment probably will have a pretty big impact on those differences in the forecasts.
Senator Manning: I want to go on another angle. In your April 2026 Monetary Policy Report, or MPR, you projected that inflation would peak near 3% in April before returning to a 2% target by early 2027, provided that oil prices moderate. I guess the key word is “moderate.” What contingency measures is the Bank of Canada prepared to take if the Middle East conflict escalates further and oil price pressures prove more persistent than the base-case projections. Oil prices, as you said, are going up and down like a yo-yo, and we’re just trying to see what contingency measures you have in place.
Mr. Macklem: Following the report, they moved higher. They’ve been coming down in the last 24 hours, but we’ll see. The base case is largely consistent with what the forward curve was just ahead of when we published the MPR.
To reflect the uncertainty, we also published a scenario in the Monetary Policy Report where, instead of coming down, energy prices just stay high. So they are kind of polar cases. One, they come down fairly quickly. In the other, they don’t come down at all. The reality could well be somewhere in between those. But the advantage of showing the scenario where they’re flat at a very high rate is that you can see what it would do. You can see a chart in the Monetary Policy Report that shows that the impact on overall inflation is much more persistent, where inflation goes up to about 3% and, instead of coming down by early next year, stays around 3% for a year and a half.
The other thing in that scenario is that, in our base case, as we explain in the Monetary Policy Report, there is an assumption that oil prices are coming back down. I’m not saying that there won’t be any changes needed in the policy rate, but if they do come back down, the policy changes should be small. We would probably be close to where we would need to be. On the other hand, if they stay up, we would probably need consecutive increases in the policy rate to ensure that inflation does in fact come back to the 2% target over the medium term.
Senator Manning: Thank you.
Senator Wallin: Of course, one of the contributors to inflation is government debt and spending. While the overall number came down, there were a lot of things not included in the spring economic update that were high-ticket items. One of those things would be the so-called wealth fund, which would be created with $25 billion of borrowed money.
Generally, wealth funds are supposed to be guardrails. You actually have to earn it or create it before you spend it. Are you concerned about that approach to acquiring debt and the impact on inflation? Do you have some comment on that? In the other place, I think you said that you were not consulted on this issue. Had you been, what would you have said?
Mr. Macklem: Look, the creation of the sovereign wealth fund is the government’s decision. It’s a matter for the government. We don’t comment on specific fiscal measures. I will say that our Monetary Policy Report came out the morning after the spring economic update, so, needless to say, the new measures that were announced were not included in our projections.
Having said that, I don’t expect that the new measures that were announced would, from a macro perspective, have a very large impact on the outlook. When we do update our forecast in July with those measures, I don’t expect that you will see much of a change in the inflation outlook as a result of those measures. It might change for other reasons.
Senator Wallin: It is a big number, though.
Mr. Macklem: Yes, $25 billion is a big number. We will need to see the details regarding the sovereign wealth fund, over what time frame it is built up and those sorts of things. At this point, it’s hard to provide much analysis.
Senator Wallin: I have a question about foreign direct investment, or FDI. As my colleagues have said, we’re looking at these issues at committee. I read a report recently that said that two thirds of the increased or record foreign investment in Canada in 2025 is actually the result of foreign-led purchases. That kind of goes against the grain of sovereignty. Do you have any thoughts on the consequences of saying that there is investment coming in but that it’s all headed toward purchases and foreign ownership?
Mr. Macklem: I don’t really have a lot to say about that. You are also seeing Canadian investment going to other countries, and that also involves purchases. So you really have to look at the net flow.
I will say that I do spend a fair amount of time outside of Canada at various international meetings. Certainly, what we’re hearing from international investors is that people are interested in Canada. People are looking at diversifying their international portfolios. Canada looks good. We have rule of law and are a well-governed country. We have energy, fertilizer and a lot of commodities the world needs. We have a vibrant service sector. We have among the best-educated workforces in the world.
There is an opportunity for Canada to attract more global capital. We also hear, though, what is holding them back, which have been very long regulatory approvals. Basically, the message is, “If it takes 5 or 10 years to get regulatory approval, I’m not prepared to tie up my capital for that long. I will go somewhere else where I can get it faster and in a more predictable way.”
Many of these regulations are in place for well-intended reasons. We don’t want to just gut them, but where we can streamline them, make them predictable and speed things up, it could unleash greater Canadian access to global capital.
Senator Wallin: I have a minute. I will do the same thing, and you can think about it. On your recent trip to China — you do travel around — you met with the Canada-China Financial Working Group, aiming to improve two-way trade, financial services and macroeconomic developments. I want a simpler explanation of what we agreed to do with the Chinese.
Mr. Macklem: What we agreed to do? If you go back to pre-2018, Canada had what was called an ongoing financial sector dialogue with China. Canada has some large financial institutions, in particular two large insurance companies, that have a long history of presence in China. Some of our biggest pension funds also have significant investments in the Chinese market. Similarly, China has invested in things in Canada.
We are really looking for opportunities to expand the mutual benefits there. As you know, China has capital controls. Probably what’s important for Canadian firms operating in the market is widening those pipes a bit so that the money can flow back and forth more freely. You will only put so much money in if you can’t get any money out. That would be an example of the kind of thing —
Senator Wallin: Thank you. I’ll come back to that, then, when we get to the second round.
The Chair: As the co-chair of the Canada-China Legislative Association, I’m very interested in that topic, by the way.
Senator Yussuff: Thank you, governor and senior deputy governor, for being here. You won’t be surprised by my question in any event.
Governor, Canadians understand the importance of bringing down inflation. I think we all understand that this has devastating impacts, but they are not equal across the board. When you are using your monetary policy to do that, who pays the ultimate cost? Many Canadians are still dealing with a cyclical job market. Wages have not been stellar in regard to growth. Food inflation is still a reality. Finally, we are seeing some give on the rental markets, so people are paying a little bit less, but there is a big cost.
As you are thinking about how we deal with rising inflation, are you also assessing the impact it will have on working people and families across this country? Ultimately, most of the people in this room, sitting around this table, will not be the people who pay the ultimate price. It is the ordinary people who can’t afford to do that. They can’t afford the extra half or quarter per cent on their mortgage rate.
Given the unequalness in monetary policy and how it impacts the people who are least able to pay for this, how do you assess that?
Mr. Macklem: Senator, I’m glad you raised that. We are very conscious that, yes, if you are a new home buyer and stretched to buy your first house and have a variable-rate mortgage, the increase in the mortgage rate will hit you very quickly.
The other reality, though, is that ongoing inflation will not help anybody either, particularly when it’s more in the necessities. Lower-income people are hit the hardest by that. I guess you have to look at what monetary policy can do. Monetary policy can ensure that inflation does remain low and relatively stable.
One thing we’ve certainly seen, going back to 2022 and 2023, as you well know, is that inflation went up to 8%. Most of the people around this table are old enough to remember the inflation of the 1970s, but there is a whole generation of Canadians who have never experienced significant inflation. They did for the first time in 2022-23, and they didn’t like it.
Unfortunately, inflation has a long tail. Yes, we brought inflation back down. Inflation has been close to our 2% target for a year and a half now, but prices, particularly for food, have stayed up. That is the long tail of inflation. It highlights that you just don’t want to let inflation get entrenched.
Look, we will do everything we can. The economy is going through a big adjustment. A lot is going on globally. We are doing what we can to support the economy through that adjustment. We lowered our policy rate quite a bit; it’s at the lower end of our neutral range. But if the risks go up that the increased inflation will become permanent, the best thing we can do for Canadians is to take action to get it back down.
Senator Yussuff: Most of what you are trying to mitigate is from external forces. This is not the result of higher wages. Certainly, prices do follow, of course, the increased costs that are passed on. Ordinary people sitting around their tables say, “I had nothing to do with this. Why am I paying the ultimate price for what the Bank of Canada is doing?” They have no other reality.
My colleague earlier said that he is already thinking of restricting his spending, and he is not in the income bracket that I am worried about the most. I am worried about the people who are not at this table and are wondering, “How do we put food on our plates tomorrow morning when I have to spend another $25 that I don’t have? Monetary policy will just make my life that much more miserable.”
As a country, we owe them an explanation because they are the people who ultimately want to improve the job market and, to a large extent, the redistribution of wealth in this country.
Mr. Macklem: You are right. Certainly, the inflation increase we are seeing now is driven by global events. In fact, ahead of the war in Iran, inflation was coming down. Core inflation was coming down. But this is the world we live in. The best thing that could happen, in so many dimensions, is peace in the Middle East, where the Strait of Hormuz opens and transportation and production are restored. That is what I hope happens, but none of us can have any effect on that.
There is only one thing we can do, really. If those prices are going to go up, they will go up. But allowing all other prices to go up will only make the situation worse. That’s what we can’t allow. That’s when the impact will really hit people even harder than it’s hitting them now.
Senator C. Deacon: Thank you, governor and senior deputy governor, for being with us.
Last November, the Bank of Canada issued a report called Towards a virtuous circle for productivity. What a great title, and wouldn’t it be nice if it were on the doorstep? It lists creating a better investment climate, increasing competition in key sectors and investing in talent as being critical to creating that virtuous cycle.
You will be relieved to know that the Banking, Commerce and the Economy Committee’s findings have aligned well with the Bank of Canada’s report. I am sure that will bring comfort to your findings.
So far, this government has been predominantly focused on growing investments in the tangible economy. The greatest source of wealth in the world seems to be in intangibles, data and intellectual property, or IP. Statistics Canada estimated that over 18 years, leading to 2019, digitally intensive sectors grew three to four times faster than non-digital sectors.
Looking at your own data and that from the most productive economies in the world, how important is it for Canada to double down on the growth of the intangible sector if we’re to move the needle on productivity across our economy?
Ms. Rogers: The short answer is that it’s important. The report that you are talking about is actually a speech given by our colleague Deputy Governor Vincent. It was a follow-up to the productivity speech. We thought, “Okay. We have your attention. We’re going to double down.” He did a really good job of that.
In a week or two, another one of our colleagues, Deputy Governor Alexopoulos, will give a speech on artificial intelligence, or AI. That might get at some of the questions you are asking.
This is an area of strength for Canada. The “Godfather of AI” is from Canada. We won a Nobel Prize for this.
We have technology, intellectual property and good research universities. It is one of the areas of investment that I think we could leverage in an effort to increase the investment, capital-deepening portion and the multi-factored parts of productivity.
Senator C. Deacon: When we compare Canada to other G7 nations in this regard, we have many of the elements, but we have not pulled them together on the ground in terms of that implementation side. We have the research and thinkers. We create the talent, but most of that talent leaves to apply their knowledge. They don’t stay.
When you are looking at comparisons where that is being done, you would see, I would think, an awful lot of growth potential that is latent in our economy purely related to the intangible sector. Would that be fair?
Ms. Rogers: We often use the U.S. as a comparison. It is a bit unfair, I think. You have big hyperscalers. You have an enormous amount of information technology, or IT, and intangible investment in the U.S. I do not know how we compare to others in the G7.
Is this something you know?
Mr. Macklem: We do have some numbers. It is actually not the easiest question because with AI, in particular, it is not like buying computers or hardware. A lot of it is more software. It is not all capitalized. So it is actually hard to compare.
In general terms, basically, the U.S. is way ahead of everybody. We look a lot more like the rest of the G7, ex-U.S. We’re all disappointed with our productivity performance. We’re all trying to figure out how we get more investment. The U.S. really stands out. The big tech champions are all in the U.S. Basically, none of the rest of us have one.
We are starting to see — and our colleague Michelle Alexopoulos will talk about it in her speech — more evidence that the big payoff from AI is not actually discovering the new AI algorithm. It is adoption. It is spreading it through the economy.
Once a year, in our April Monetary Policy Report, we look at the assumptions underlying productivity growth. We did that again this April. We have now built in some positive boost of AI adoption into Canadian productivity growth. It is not big. It is 0.2 percentage points of growth on average going forward. It is actually a bit smaller than that in the near term and builds up over time. Hopefully, that is a low. That is too low. We can certainly do better than that, but we now are sufficiently convinced to put something in.
Senator C. Deacon: Thank you.
Senator McBean: I have heard you many times here talking about how the Bank of Canada has held the rate at 2.25% and that you are watching the price of energy, noting that it can affect the price of other goods and services.
For the other increases, is it an art or a science? Will the Bank of Canada anticipate inflation of other goods and services or respond? Which indicators would be seen as the straw versus the camel’s back?
Mr. Macklem: I think it is safe to say that, yes, it’s part art and part science, and it’s part backward-looking and part forward-looking.
The thing about monetary policy is it works with a lag. To spell it out, if we raised interest rates today because we were worried about future inflation but oil prices come down, by the time the higher interest rates feed through to the economy and start having an impact, inflation would be down, and we would wish we hadn’t raised them.
The other side of that is that if we wait too long to raise them and inflation goes up and starts to become sticky or embedded, it is going to take more work to get it back down, and we’re going to wish we raised it earlier.
We have to manage both sides of those risks. We can’t only look backward because we have to look forward. The data we have, of course, is always backward-looking. We don’t have data about the future. We take the data apart and try to look for signs of what might be coming.
As I responded to one of the previous questions, what we’re forecasting is total CPI inflation, but we use our measures of core inflation, for example, that strip out the volatile things. If we start to see core going up with higher energy prices even though energy prices are included in core, that means that other things are going up.
Those are the kinds of things we look at to try to get a sense of whether it is spreading or not. We know there is going to be some spreading. Airlines are already putting in surcharges. You are getting delivery surcharges. You are going to expect to see some spreading, but if that spreading leads to more and more spreading, now we have a problem.
Ms. Rogers: I was going to add that one of the only things that the governor did not mention that is on the list is that we do ask both businesses and consumers what their expectations for inflation are.
We pay particular attention to business expectations because if they start to drift up, that can tell us they will start to think about that as they negotiate contracts and set pricing strategies and that kind of thing. That is another input that is a leading indicator for us.
Senator McBean: You don’t have any red-line items or indicators that trip the system?
Ms. Rogers: You said it perfectly: part art, part science.
Mr. Macklem: There is a whole range of indicators. None of them is perfect, so you have to look at them all, and you have to come to an overall judgment.
Senator McBean: I imagine that makes for a pretty stressful job.
Ms. Rogers, you were talking earlier about how decisions on risk are made with safety and soundness in mind.
Mr. Macklem, you were also talking about how risk needs to be managed and how you look at assumptions of growth with productivity growth.
My colleagues have talked about the study that we are doing on access to capital and credit for small- and medium-sized enterprises, and we’ve heard people wonder about the fact that it is our large financial institutions and pension funds that have so much of the market capital, the Canadian market money.
The money in our large financial institutions and pension funds benefits from policy that protects that money’s growth and also encourages less risk.
We have heard some people suggest that perhaps there would be a new adjustment to policy that would allow for some of that money, whether it be 2%, 3% or 4%, to come back in and really activate the growth capital within the country.
As a player in the macro sense of finance in the country, do you think there is some way that our own financial system could step away from being a risk-averse hoarder and start creating growth in its own system by trickle feeding itself?
Ms. Rogers: I would be interested in what you find in your study. One of the interesting data points we have is that we don’t see the problem being a supply problem as much as a demand problem.
We do a regular survey of lenders on credit demand and conditions. What we’re seeing in the data is that the demand isn’t there that we would expect. As I said, I will be really interested in your study. I’m not convinced that this is an access or availability issue. It might come back to a broader definition of risk aversion in our business community and the drive to invest, and this comes back to things like competition, trade barriers and that sort of thing.
I think there is probably a bit of both. There may be opportunities to fine-tune regulation, the different types of funds that are available or public-private partnerships, P3s, those types of things, to get capital moving a bit.
I would encourage you to also look at the demand side for capital because what we see in the data is that it is not there.
[Translation]
Senator Saint-Germain: Governor, deputy governor, allow me first to congratulate you. Your website is very well designed, and your opening statement is already available there. I find the highly factual information and the data you provide in support of your analyses to be very interesting. This is not always easy to do in the financial sector, and I wanted to emphasize that.
My question concerns the structural indicators you mentioned. You discussed the impact of U.S. tariffs on the Canadian economy. You also discussed the war in the Middle East and its impact on oil prices. I would like you to address another phenomenon and tell us what monitoring you are doing. Is this an indicator of significant structural changes? I’m thinking of two very specific aspects of artificial intelligence. Your role involves ensuring that the Canadian currency remains stable and secure. This includes protection against fraud. Do you believe that the development of AI, which could eventually lead to the disappearance of paper currency, poses major risks? If so, are you already taking steps to address this?
The second aspect is that of employment. You mentioned in your opening remarks that employment is experiencing a decline that, while not major, is nonetheless real. At the same time, fewer people are looking for work. With the continued development of AI, do you anticipate that this impact on employment could become more significant?
Mr. Macklem: Regarding the economy’s potential growth rate, as I mentioned, we believe that the adoption of AI by Canadian businesses is having a positive effect. It is possible that we’ve underestimated this effect. It may be greater, but we do believe it is positive.
As you pointed out, risks do exist. In recent weeks, we have seen cyber-risks. This has been highlighted, particularly with the new versions of Anthropic’s Claude. Discussions are taking place between us, the major Canadian banks, and the Canadian Centre for Cyber Security to ensure the system is ready to address these new risks, which are not really all that new. Advances in AI do not really entail new risks. AI has a new ability to increase the speed at which vulnerabilities can be found and exploited. You don’t need to be an expert in the field; you just need to use AI as an expert, which can increase the number of attacks. We need an effective and rapid protection system. Together with the Canadian Centre for Cyber Security, we’re talking with Anthropic and the banks to make sure we’re ready. This is an example of the risks posed by AI.
Senator Saint-Germain: On your website, you also provide advice on how to prevent fraud and counterfeit paper currency. Do you plan to ask the banks to provide similar guidance regarding cryptocurrencies and any currency that might be developed or traded using AI processes?
Mr. Macklem: You’re right to say that there may be some interaction between various innovations, cryptocurrencies and AI. It’s also possible that quantum computing could revolutionize security and cryptotechnology. In a committee that we chair and on which the banks sit, we discuss precisely these kinds of issues to ensure that the system has the best information, that this information is shared, and that the best plans are in place to ensure security. There are no guarantees. Should an incident occur, we need a system capable of responding to it.
Senator Saint-Germain: So you’re aware of the issue and you’re developing safeguards to protect against it.
[English]
Senator Pupatello: Welcome to the committee. I wanted to ask about the impact of the United States-Mexico-Canada Agreement, or USMCA, and I noticed some of the review that you did if this remains the same, increases tariffs, et cetera.
Did you do a review on what our economy would look like in the absence of the USMCA, with the speculation that the U.S. President made not long ago about the potential of just letting it lapse? Did you do that significant black swan exercise?
Mr. Macklem: A couple of things. One thing to underline is that if the U.S. President doesn’t do anything, it doesn’t lapse. It is an ongoing agreement. There has to be some action taken to actively change it. Then the question is: What could happen?
In order to analyze it, you need a scenario. So what does “change it” mean? We have done a range of scenarios. We published some of them in earlier Monetary Policy Reports. I’ve also given a number of speeches, particularly at the beginning when it was completely unpredictable what might happen with various scenarios.
To give you an example, right now, there are a number of sectors — auto, lumber, steel, aluminum, furniture — that are being hit very hard by very high tariffs. The rest of the economy continues to operate under the Canada-United States-Mexico Agreement, or CUSMA, so it continues to operate tariff-free. Actually, Canada’s average tariff rate is among the lowest in the world. It is about 5% with the U.S. Over 90% of the economy is still operating tariff-free.
If, for example, the U.S. President were to do what he has done to most other countries and apply a universal tariff across the board, say 10% or 15%, that would have a very significant effect on the Canadian economy. We have provided some illustrative simulations or scenarios where that happens.
Instead of having a negative quarter and then the economy getting back to growth, admittedly on a lower trajectory, you are probably looking at several negative quarters, so what people would typically call a recession.
Senator Pupatello: Can you tell me if you’ve done a review of the impact of the USMCA on other countries, say Canada compared to the EU? How would we align? Do you do any of that kind of work?
Mr. Macklem: Yes. What we have looked at is how U.S. tariffs are affecting other countries and how they are affecting Canada.
One thing that actually is quite interesting is that, although Canada probably has the lowest average tariff rate with the United States, the impact on Canada is quite high.
In fact, if you compare countries — I can’t tell you every country, but if you take big blocks like the EU and Canada — what you see is that the impact on Canada is second. The biggest impact is on China — there are very high tariffs on China — and the second-biggest impact is on Canada, despite the very low average tariff rate.
Why is that? The reason is that, obviously, U.S. exports are a much bigger part of our economy than they are in other economies. Our exports are much more concentrated on the United States.
But there is another important reason. Most other countries make stuff, and they send it to the United States. The U.S. makes stuff, and they send it to the other country. Canada and the United States make things together. We’ve had no economic borders since the free trade agreement in 1989, so companies on both sides of the borders have optimized production with inputs on both sides of the border and things going freely across the border.
For those sectors that are affected, this business model is being seriously disturbed, so that is having an outsized impact on Canada.
Senator Pupatello: The new Fed chair is unlikely to give advice to his President about the impact of a deleterious effect on the USMCA, like the elimination of it, or an impact of a new tariff across the board. So would our Governor of the Bank of Canada make a comment on what would happen in the U.S.A.’s economy should the President make those kinds of changes?
Mr. Macklem: Would I say something about that?
Senator Pupatello: I think that governors have done so in the past.
Mr. Macklem: I was not sure who you meant.
Well, I have. I have not spoken with the President about it; that’s not my job. But I have certainly given public speeches where I have highlighted the impacts on Canada. I have also highlighted that this is actually bad for both countries.
Senator Pupatello: Do you have any numbers to back up what could happen in the American economy and in which sectors in particular?
Mr. Macklem: No, we have not done forecasts of the impact on the U.S. economy, but we have certainly looked at the benefits of free trade between Canada and the United States and how that has benefited both countries and how, if you disturb free trade, it is going to hurt both countries. We have not done detailed simulations of different scenarios in the U.S.
[Translation]
Senator Henkel: Welcome to you both. I apologize for being late. Governor, your Monetary Policy Report from April 26 describes two simultaneous realities facing Canadian businesses. Their costs are rising because they are reorienting their supply chains, and their revenues are under pressure because demand for exports has weakened significantly. In your models, these forces balance each other out in their effect on inflation. However, for an SME experiencing both at the same time, there is no balance at all.
How does the Bank of Canada distinguish between price stability resulting from a healthy economy and stability resulting from two pressures that cancel each other out at the expense of businesses?
Mr. Macklem: We agree that the very high tariffs imposed by the United States on certain sectors and the uncertainty surrounding U.S. trade policies are having a significant impact. The reality is that our relations and trade with the United States have changed. As you mentioned, Canadian companies are seeking new markets for their products.
At this point, we see that exports to the United States are down sharply and that exports to other countries have increased. Since 75% of our trade is with the United States, the increase in trade with other countries has not offset this decline in trade with the United States. However, trade is becoming more diversified.
In our surveys of businesses, we often hear that they haven’t yet found new markets, but that they are exporting more to their foreign customers than in the past and are trying to find others. The situation is difficult and will take time. There are also additional costs, as finding new markets is expensive. We’re trying to take action through our monetary policies. We know that restructuring is under way, and we’re trying to support the economy during this period of restructuring. Our job is to control inflation, but we’re still trying to help by making adjustments wherever possible. At the same time, we must ensure that the inflation rate remains low and stable.
Senator Henkel: The Monetary Policy Report from April 2026 acknowledges that, before 2015, when oil prices rose, the Canadian dollar also appreciated. However, this is no longer the case. Investment in the oil sector has declined. Profits are increasingly distributed as dividends, and demand for the Canadian dollar is no longer keeping pace. Canadians are absorbing rising energy prices without the cushion that a rising Canadian dollar once provided.
Does the Bank of Canada view this as a permanent structural change? If so, how does this affect your monetary policy?
Mr. Macklem: “Permanent” is a strong word; I’d say “persistent” instead. I don’t think things are going to change very quickly. We agree that, historically, when oil prices rise significantly, it’s due to strong international demand. This leads to significant investment in Canada’s oil sector, which drives up the value of the Canadian dollar.
This time, it’s not about strong international demand. Rather, it’s a decrease in supply linked to the situation in the Strait of Hormuz. For several years now, the Canadian dollar has been much less sensitive to fluctuations in oil prices than before, and I expect this trend to continue. We take this reality into account when formulating our monetary policy.
As you mentioned, historically, when oil prices rose, the exchange rate also rose. This reduced the impact of rising oil prices on consumers, because the appreciation mitigated the effect on prices in Canada. Now, with fewer fluctuations in the exchange rate, we’re seeing a greater impact on inflation. On the other hand, if you’re a manufacturer exporting your goods abroad, the fact that the dollar hasn’t appreciated hasn’t reduced your competitiveness.
So there are indeed two effects occurring, and we take them into account when making our forecasts.
The Chair: Before we move on to the second round of questions, I have a question myself.
I want to echo Senator Saint-Germain’s comments: Not only is your website very well designed, but your research is of the highest quality. I’ve been reading your research reports for decades.
One report caught my attention: the one on maritime trade. There are many things I hadn’t realized. You stated in your research report that Canada fell from sixth place in 2016 to twenty-third place globally in terms of tonnage.
You state in your report that, during the same period, the United States dropped from second to third place. Why did Canada slip from sixth to twenty-third place? It is because of our capacity to accommodate new ships in terms of tonnage. They often go to Los Angeles or the U.S. West Coast. You say that all of this, particularly these changes in trade connectivity, could make Canada less economically resilient. Can you tell us about this study, which addresses a sector I never would have thought could make us more vulnerable?
Mr. Macklem: The data you just cited pertains to our ports. There’s a lack of investment in our ports, in contrast to those in the United States. For example, many of the products from China that are now arriving in Canada, before U.S. tariffs were imposed, used to go first to Los Angeles and then to Canada. So, since the United States imposed tariffs on China, products from China are more expensive in Canada, even though there are no tariffs here. What we’re seeing now is more direct shipping from China to Canada to avoid paying U.S. tariffs. That is an example that shows that Canada could be more resilient and less affected by changes in the United States if we had greater port capacity.
The issue is really much broader than that. It’s not just about capacity at our ports, but also that of our pipelines, trains and trucks. The reality is that the United States is very close to Canada. We’re very good at moving goods from north to south. Our country is vast, but we haven’t invested enough in transportation within our country and in finding new markets.
So, if there were better connectivity within the country and greater capacity to move our exports elsewhere, we would be more resilient.
The Chair: First, I’d like to confirm something: We had planned for you to stay with us until 6:15 p.m., if that still works for you. There’s a lot of interest around the table, as you can see.
Colleagues, I propose a second round of questions, during which you will each have four minutes, if that works for you. Let’s begin with our deputy chair.
[English]
Senator Varone: I will go back to where I left off on the last question, but I wanted to add a little twist. As big as that black hole is with the lack of information, I do want to separate organized crime from that black hole and pretty much concentrate on blue-collar and white-collar tax avoidance. Countries like Australia and New Zealand and some others have deployed a reduction in personal income tax and a corresponding increase in consumption tax to try to batten down that hatch, and they’ve shown some progress in it.
Is that a landscape we are currently studying and looking to move forward on or at least tracking to see what those kinds of differences are?
Ms. Rogers: That’s tax policy, which is not our domain, but I did spend a little time while we were going around the table thinking about how to answer your original question. There is a parallel to the question we got earlier about private credit. In general, we like our data. In the case of private credit, our blind spots in the data are largely from unregulated lenders. For all of the regulated lenders, we get tons of data. I was talking earlier about the data that we get when we survey lenders. When it comes to under-the-table economic activity, by its very definition it’s not showing up in the data that we can use to make our decisions. I think that’s probably all I could say about that.
I will say, if I widen the lens a bit on your question, that we are continually challenged to keep up with these types of issues. One that we have been talking about recently is algorithmic pricing and all the different techniques around pricing. Again, we will need to change how we measure things and the types of data we collect in order to stay on top of what is going on in the economy. Your specific issue, the underground economy, will always be a challenge because its very purpose is to not be measured. Most people pay in cash, so it is not measured. That’s the point you are making.
Do we worry about it? Sure. Is it an area where we have policy levers to solve it? No.
Senator Varone: Is the degree of it unknown?
Mr. Macklem: There are estimates. Academics have produced estimates of the underground economy. I have not seen the very latest research, and I haven’t seen research to suggest that it is growing rapidly.
There is a broader problem with fraud. New technologies are making it easier for fraudsters to basically scam more people. The Canadian government is standing up a new agency called the financial crimes agency. I expect it will take a couple of years before it is operating. It is not our job to comment on specific initiatives, but I think there is some recognition that this is a growing problem. We have to do a better job here in Canada.
Senator Loffreda: I’ll talk about the equity markets and the effect on your monetary policy, and you will see where I am going. Despite persistent global uncertainty, including global political tensions — the list is long — trade disruptions, elevated debt levels and slower global growth projections, equity markets have remained relatively strong and resilient. I totally understand the Bank of Canada’s role.
Equity markets affect the economy, and the economy affects monetary policy. Given the uncertainty, why are they so disconnected from reality? Is that a concern? You did say that you don’t only look back; you also look forward. How would you explain that performance? Are you concerned, looking forward, about those equity markets? If you look at the valuations today, they are extremely high. Look at bank valuations. I don’t verify them every day, but last time I checked, they were multiples of 16. When I was at the bank, they were multiples of nine at times and eight also.
Mr. Macklem: Ms. Rogers may want to supplement.
It takes many views to form a market. Some people think the market is undervalued, and some think it is overvalued. Do we think there is some reason to be concerned? Yes, we do. We will have a new Financial Stability Report coming out at the end of this month, and we will expand on that in that report.
As you say, conventional indicators, price-to-earnings ratios, or P/E ratios, and forward P/E ratios are unusually high.
It is not my job to explain or defend the market, but if you talk to the optimists, they are saying, “Earnings are great. AI is here; it will drive massive increases in earnings, so that’s capitalized into the current price.” Others are looking at it and saying, “Well, yes, maybe, but maybe not, and there’s quite a bit of downside.” Obviously, if you do see a big correction in equity markets, that will have an impact on all our economies. The big question the market is asking is: Is AI a bubble?
Coming back to the issue of AI as a transformative technology, it is true over history that a technology could be transformative and there could be a bubble.
If you look at the dot-com bubble or go back to the railway boom 150 years ago, these are periods when you had transformative technologies, but they did lead to overvaluation and a big correction. These things can have consequences. Obviously, they can have economic consequences. If that happens, you have to take that into account in monetary policy.
Another one of our mandates, though, is to foster a stable and efficient financial system. Nobody wants to see equity prices go down, but by themselves they don’t tend to create financial stability problems.
Private credit, for example, is heavily invested in AI. If there is a correction and that leads to a private credit problem, the economy slows and you get credit quality issues elsewhere. That can spill more into the financial system, which can be an amplifier to the downturn. The financial system then has to de‑lever or pull back from lending, which magnifies the recession. That’s the sort of thing we worry about. That’s why you have OSFI try to make sure the banks are well capitalized, have adequate liquidity and are not over-leveraged so that, if that happens, they can absorb it and don’t have to pull back and amplify it. Those are the sorts of things we worry about.
The Chair: That’s a nice try, senator. The last time a G7 central banker made an opinion on equity valuation was 30 years ago, when Alan Greenspan used the phrase “irrational exuberance.” The market has continued to increase for 30 years. You know what? They usually refrain from commenting on equity valuations. That’s my conclusion.
Senator Fridhandler: Moving off high tech to low tech or old school tech — our resource sector — it looks as if we’re refocusing on improving the supply side. Our pipeline export capacity is starting to hit its limit, but we’re looking at new infrastructure.
How do the hydrocarbon sector and other resource sectors figure into your forecasting and your policy determinations?
Mr. Macklem: That’s a pretty broad question.
We look at government spending, both how much the government is spending and what they are spending on. To the extent that they are investing in new infrastructure to improve transportation and to develop new pipeline capacity and infrastructure capacity, that does add demand, but it also adds supply to the economy.
The timing may be off between the supply side and the demand side — they’re not going to match up perfectly — but, over time, the two are going up at the same time.
If the government is just adding to demand and you are starting in a situation where your economy is overheated, that could be a problem. That’s not the situation we’re in now. The economy is weak, and there’s certainly some excess supply. So there’s some room to grow more without causing inflation.
As we said, we take the government’s spending plans and try to assess how much of that investment is going to move the supply side and how much of it will add to demand. That’s what we build into our forecasts.
Senator Fridhandler: Will a return to a strong petrodollar make your life easier on managing inflation?
Mr. Macklem: Higher oil prices have multiple effects on Canada. Obviously, for households and most businesses, higher gasoline prices are squeezing them, which will tend to reduce their spending.
Canada has an advantage, though, compared to many other countries in that we are a large net exporter of energy. So when the price goes up, there is more income coming into the country. What you see in our forecast is that higher oil prices don’t have much impact on overall GDP growth. It changes the composition. Some people are getting squeezed. Others are benefiting. But, overall, there is not much impact on GDP growth. There obviously is a very direct impact on inflation.
Senator Wallin: I’m just going to go back to AI for a moment. You said, governor, that the big payoff for AI is adoption, but it is adopting itself. It is moving at such a rate right now that it’s breathtaking. We’re way beyond automating tasks. This automates judgment and decision making, and that’s already real. I am surprised at the sanguine nature of our discussion here. Is this not a break-the-glass moment?
Mr. Macklem: We do surveys. Statistics Canada does surveys. When you survey companies and you ask them if they’re using AI, most of them say, “Yes, we’re using AI.” We’re probably all using AI.
When you ask them if they have used AI to significantly transform an important part of their business, it’s still a pretty low number. It is going up, but it is still pretty low. It may go up at an increasingly fast rate. It may go up at a linear rate. It is hard to predict.
Senator Wallin: Who is ready for this? Are you ready for this? Is the government ready for this? Are businesses ready for this? What is your thinking?
Mr. Macklem: The other thing we see when we talk to companies is that it depends on what sector you are in. If you ask the financial sector, you get a much higher response rate for their use of AI than some other sectors.
Are we ready for this? From a monetary policy perspective, we would certainly be happy to see higher productivity growth. That would allow the economy to grow more quickly without creating inflationary pressures. Higher productivity growth pays higher wages and higher incomes in the economy.
We have an affordability problem in this country. How do you get out of an affordability problem? You grow your revenue.
But the other side of that is how disruptive it will be. Whose jobs get displaced? Will they be able to find new jobs? Will it create enough new jobs? These are issues of large debate.
We look at different scenarios. We try to plan for different scenarios. There are a lot of other broader questions that go way beyond the Bank of Canada, though, such as if we are ready as a country.
Ms. Rogers: I think the opportunity for Canada is if we can figure out how to help our small-business sector leverage AI.
As the governor said earlier, right now the advantage that the U.S. has is the investment in AI. But the real payoff in AI is going to be whether it gets used, deployed and increases productivity, particularly if it does reduce employment. Then you really need the offset benefit.
The Canadian economy is many small businesses. When we are talking to business right now, big businesses are figuring this out. We are relatively big. We are 2,500 people. The effort, the skill, the hiring and stuff you have to do, just in our business, are a big lift.
I wonder about small- and medium-sized enterprises. The U.S. can be the one that builds it, but if we can be the one that figures out how to use it and how to use it in the small- and medium-sized enterprise sector, that would be a gain.
Senator Yussuff: I want to go back to the governor.
The reality is that inflation will be a challenge unless this war ends soon and oil prices come down. I hope you take care to explain to Canadians — we know it will have an uneven impact on people. I think there needs to be some reassurances in that regard.
Let me ask you the most important question. A year ago, we were having a big debate about how to build one national economy. We’re breaking down barriers provincially across this country, and the provinces, in fairness, are working with the federal government in a very robust way. We have seen a number of barriers that have already gone.
Are you measuring the scale at which this is happening? More importantly, what impact is it having in driving productivity and, of course, making the economy more productive?
We know that many of these barriers had nothing to do with the productivity of the country; it had to do with protecting one’s turf. Given that they’re coming down, are you measuring and following it as it is happening so we can get an ongoing assessment? The argument had been made about how much it was costing the national economy. Is it still doing that? If it is not doing that, where are the costs being passed on to consumers who should be benefiting from this?
Mr. Macklem: I appreciate your advice. I couldn’t agree more. We are accountable to Canadians. They deserve a clear explanation for our actions. They deserve our best sense of where things are headed, and we are certainly committed to doing that.
Why don’t you say a few words about the interprovincial issue?
Ms. Rogers: Sure. I will just add a bit to that, though.
I think you read our speeches, and I hope you see that we do try to talk to Canadians. To be really honest, the point that you are raising is frustrating for us, too. We have one tool, and we know it affects people in very different ways. We know it hits low-income people harder.
As the governor said, there is only so much we can do. We feel a huge responsibility to keep inflation in check. In our consultations and speeches, we do try to talk to all Canadians.
Let me come to your question on interprovincial trade.
I wouldn’t say that we are measuring this in a lot of detail, but there are others who do. So I don’t think it is something we need to do. The OECD has a barometer, and I think the federal government actually also introduced an interprovincial trade tracking system in 2024.
Our view on the progress is that it remains encouraging. It is still an area of focus. I think the message has landed that this is a known goal. We don’t need any cooperation from the U.S. to fix it; it is within our control. The early focus has been on goods, which is probably the easiest thing to tackle. What we do need to see is more progress on trade in services or labour mobility. If you are an architect in one province, you should be able to work in another province without having to rewrite your exams. It is that kind of thing. I am a chartered professional accountant, or CPA, and I don’t know how many different CPA bodies we have across this country. More focus on labour mobility would be the next thing we would like to see.
Ultimately, though, the other advice we would give is to keep the objective in mind, which is to remove barriers and friction for businesses to make it easier for them to do business across borders. Often, in an effort to try to solve these problems, we see governments introduce memorandums of understanding, MOUs, additional agreements and more rules that are designed to get rid of barriers, but they just add layers of administration for businesses to go through.
So if you keep the objective in mind, it should be to remove frictions and things, not to add things, to make things easier and then, as I said, a bit more focus on labour services.
Senator C. Deacon: Thanks again for being here.
It is estimated that 99% of the global stablecoin market, $250 billion-ish, is pegged in U.S. dollars. Canada passed the Stablecoin Act. You indicated that perhaps sometime in 2027 we will see the regulatory framework in place and working.
But the market is continuing to move at a pretty rapid pace. We saw Tetra Digital Group in Alberta launch a Canadian-backed stablecoin, and Wealthsimple announced yesterday a deal with Visa to start testing a U.S.-dollar-backed stablecoin for settling transactions in Canada.
From a monetary policy perspective, if U.S.-backed stablecoin transactions start to gain traction and be increasingly adopted in Canada, is there a point that might set off an alarm at the bank to speed things up and get things moving a bit faster? In the meantime, will the bank be working to ensure that we have a competitive Canadian-dollar-backed payment rail?
Mr. Macklem: Yes, there is a point at which the alarm bells would go off at the Bank of Canada. We are a very long way from that point. Frankly, it is an open question just how big stablecoins will be. It is very important that we have a very high‑quality stablecoin regime in Canada. If stablecoins are going to be big, we definitely want to have Canadian-dollar stablecoins. We are moving and working hard with the Department of Finance to get the regulations.
We’ve been given a number of new responsibilities, as you know well — oversight of the retail payment system and open banking or consumer-driven banking as the government calls it — in addition to stablecoins.
Although these are all different, a lot of the players are the same. We need similar systems to oversee these. The advantage of putting it in one place — the Bank of Canada — is that there are synergies, from our perspective, in providing the systems to do this. It will also be easier for the market players. They could come to us and deal with one player for multiple different things. That should help us go faster. It should make life easier for the private sector.
I think how big stablecoins become is an open question. Are they a stepping stone to tokenized deposits?
The other thing we are doing, as you may have seen, is experimenting. Project Samara, for example, is using general ledger technology in central bank money to facilitate wholesale transactions.
We’ve been doing these types of pilot experiments to get different technologies working. We can’t do it by ourselves. That one was a joint initiative with Export Development Canada, or EDC, and two of our large banks here in Canada. You will see more of those as we try to accelerate.
I don’t think you can put all your eggs in one basket and say, “This will be the technology. Go hard on that one.” We have to stay nimble.
Senator Pupatello: In my earlier question, I was looking for whether there would be work done in your shop around the economic impact of, again, more tariffs, et cetera, on the American economy related to the USMCA and our relationship between the U.S. and Mexico. Is there an opportunity to do some of that to show the impact if it was 5% or 15% across the board? All of this activity is outside the USMCA now anyway. They have already abrogated the agreement.
I would like to ask about the Buy Canadian Policy. You mentioned in the last report that it had some mitigating factors in Canada. Can you tell us how much? It is just getting going. For example, as CanadaBuys and the procurement policies for the Canadian government start to roll out, what could its eventual impact be that might be even more mitigating?
Mr. Macklem: Coming back to your first point, I want to stress that we don’t do trade policy at the Bank of Canada. Trade policy is correctly in the hands of elected governments, and I know government officials are engaged with the U.S. government, state by state and in Washington, and making these points. That is really their job. It is not really appropriate for the Bank of Canada to weigh in on Canada-U.S. trade policy.
Our job is to understand the impacts here in Canada and what that means for monetary policy. That’s our focus.
On your second question about the Buy Canadian Policy, it is actually a very hard thing to assess analytically. How do you measure people’s change in preferences for American or Canadian goods?
There are some places where you can see it in the data, but, of course, there are many other things affecting the data. We have no way of measuring directly the effect of the Buy Canadian Policy.
The obvious place where you can see it is in Canadian trips to the United States. Canadian tourism to the United States is down. It is up to other locations: Mexico and Puerto Rico.
You can see some shifts in preferences. Airlines are changing their flights. There are some things where you can see it directly.
When you move beyond things that are so clearly American, it is very hard to measure. I cannot really give you an answer.
Senator Pupatello: Somewhere in your report you mentioned the Buy Canadian Policy as a mitigating factor.
Mr. Macklem: We can give you direction. We can see it very clearly in certain things, but we cannot give you an overall number.
Senator Pupatello: Is there a marker that you would put as a goal and say, “if this, then that”?
By the way, I asked the financial officials as well if they are setting any markers to show that, when they enact these policies, they can see any difference beyond the cellular tower data that is referenced in some of the articles.
Mr. Macklem: I am not sure that we have a very good way to measure it.
As we see the impacts in Canada, we can take those into account, and you can try to extrapolate forward. We don’t have any kind of index of the Buy Canadian Policy that you can then link to what you see in the data.
The Chair: Colleagues, we have around 12 minutes left. I have a question myself.
To conclude the second round, I will have my own questions. The finance minister made a big deal that foreign direct investment in Canada has reached a 20-year high and that, per capita, it is twice that of the U.S. But have you drilled down to the number? What is this foreign direct investment? Is it the fact that foreign ownership in Canada is going up because foreigners buy our Canadian firms and don’t truly invest? Is it because the IP is sold to the U.S.? In fact, is it positive? What is your reading? Or is it that foreign companies invest in Canadian subsidiaries? I have not really checked the numbers. You have a number of good economists, I think, at the Bank of Canada. What is your reading regarding that?
Mr. Macklem: I do not have a detailed breakdown of that in front of me, so I am afraid that I cannot answer your question.
The Chair: A nice try from my side to have that.
They mention that Canadian institutional funds, including pension funds, are stepping up and working with the government on new opportunities. Maybe it will change in the future, but so far Canadian pension funds have invested much more abroad than the opposite. I was curious. If you have any written answers down the road, I will take them.
Senator Loffreda: Debt levels are important. It is always the capacity to repay that we look at, not just the level of debt.
You hear a lot of different stories. We have heard from the government that our net debt-to-GDP ratio is outperforming the whole world. I was at the World Bank and International Monetary Fund, or IMF, conference, and I heard some of the opposition say, “Well, if we look at the gross debt, it is not the same story.” As Chair of the World Bank and IMF Parliamentary Network for Canada, we’re going to cc you and clarify that position with respect to gross debt over GDP.
Are you concerned about our debt levels? To what extent are we outperforming the world when it comes to financial performance? We all know how it is calculated, which is gross debt less our pension funds, and many countries do not have those pension funds. Europe does not have them. It is pay-as-you-go. We do have them.
As a CPA myself, I think it is an asset and that it is fine to put net debt over GDP. But what are your thoughts on that, and what is your concern with respect to monetary policy when it comes to net or gross debt? Are you concerned about our gross debt and the provincial debt when it is added to all of that? Maybe we have a little more time, Mr. Chair. I think that is a good question.
Mr. Macklem: I can start, and maybe the CPA will supplement my answer.
I think whether you look at gross or net debt depends a little on what the question is. If you are looking for the sustainability of your debt, you are right; having an actuarially sound pension system is an asset for the country and should factor into your sustainability.
If you are looking at what your funding requirements are on an ongoing basis and how much is rolling over every month and what would happen if there was a freeze-up in global markets and a liquidity crisis, you have to be thinking about your gross debt because that is what you actually have to roll. Again, it depends on what the question is.
Typically, people are looking at sustainability, and, in that sense, I would say net debt is a better number than gross.
Senator Loffreda: But are you concerned about our debt levels? I see the opposition putting the trillion-dollar number on the screen to kind of scare off the viewers. How do you view our debt level and future monetary policy with respect to the economy?
Mr. Macklem: I generally don’t comment on fiscal policy. If I thought our debt level was unsustainable, that would be impinging monetary policy, and I would be talking about it. If I thought that the government was spending so much money that we couldn’t control inflation, I would be talking about that.
I don’t think our debt is unsustainable. Canada still has a Triple-A credit rating. I certainly hope we can keep it.
In relative terms, Canada looks pretty good compared to a lot of other countries, as you said. We run the auctions for Canadian government debt. They are certainly well covered. They have minimum tails. I’m not seeing any immediate issues.
Senator C. Deacon: I’m glad to be the cleanup hitter of a great meeting. Thank you again for being with us.
When you look at foreign direct investment going into tangible assets, it is great because there is no economic leakage. You can calculate the benefit to the economy. But when they’re investing in intangible assets, there is an awful lot of economic leakage associated with that. How are you managing that in your own calculations in terms of the benefits to the economy and where you see that moving and the associated risks and opportunities?
Mr. Macklem: You might have stumped us.
Whether you are Statistics Canada or the Bank of Canada trying to feed this into your models, measuring intangibles is much more difficult. Statistics Canada does their best. We do our best in our models. But you have to be aware that we’re probably doing a better job of measuring physicals than intangibles.
As intangibles become more important, that may become a bigger problem. I’m not sure that I have a very good answer. But, yes, it is another source of uncertainty coming down to measurement.
Senator C. Deacon: I don’t want to put words in your mouth, obviously, but can I take from what you are saying that the growth of intangible investment in this country and the growth of intangibles in the economy are increasingly important as we move forward? If foreign direct investment doesn’t focus mainly on tangibles, there is a risk that there is a lot more leakage. There is evidence that there is a lot more leakage, and that is something we probably should start to take some time to look at and get some parameters for evaluating that to help guide our fiscal policy. Right now, I see FDI being celebrated no matter what, and I don’t feel that from a policy standpoint. I think we need some tools there.
Mr. Macklem: I can say two things quickly.
We need more investment in physicals and intangibles. It is not one or the other. We need both. We have had chronic underinvestment for a long time.
My second comment is that, yes, if the Senate wants to take this on, we’re right behind you.
Ms. Rogers: We will wait for your report. We may have questions.
The Chair: Governor Macklem and Senior Deputy Governor Rogers, on behalf of my colleagues, I wish to extend our sincere thanks for appearing before us today. This session is always informative. We appreciate your time. We will see you after the summer.
Dear colleagues, the next meeting will be tomorrow, Thursday, at 10:30.
On behalf of my colleagues, I want to thank as well our interpreters, as usual, and all of the logistics behind us.
(The committee adjourned.)