Finance Committee on May 2nd, 2024

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 141 of the House of Commons Standing Committee on Finance. Pursuant to Standing Order 108(2) and the motion adopted by the committee on Monday, November 21, 2022, the committee is meeting to discuss the report of the Bank of Canada on monetary policy.

Today's meeting is taking place in a hybrid format, pursuant to Standing Order 15.1.

Before we begin, I'd like to remind all members and other meeting participants in the room of the following important preventive measures. These have changed a little bit, members, through a message you would have received from the Speaker's office.

To prevent disruptive and potentially harmful audio feedback incidents that can cause injuries, all in-person participants are reminded to keep their earpieces away from all microphones at all times.

As indicated in the communiqué from the Speaker to all members on Monday, April 29, the following measures have been taken to help prevent audio feedback incidents.

All earpieces have been replaced by a model that greatly reduces the probability of audio feedback. The new earpieces are black in colour, whereas the former earpieces were grey. Please only use the approved black earpiece. By default, all unused earpieces will be unplugged at the start of a meeting. When you are not using your earpiece, please place it face down on the middle of the sticker that you will find on the table, as indicated. Please consult the cards on the table for guidelines to prevent audio feedback incidents.

The room layout has been adjusted to increase the distance between microphones to reduce the chance of feedback from an ambient earpiece. The measures are in place to allow us to conduct our business without interruption and to protect the health and safety of all participants, including the interpreters.

Thank you all for your co-operation.

I'd like to make a few comments for the benefit of the members and witnesses.

Please wait until I recognize you by name before speaking. Members in the room, please raise your hand if you wish to speak. Members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as best we can, and we appreciate your understanding in this regard. I would remind you that all comments should be addressed through the chair.

Now I will welcome our witnesses. We have with us, from the Bank of Canada, Governor Tiff Macklem.

Welcome, Governor.

Joining the governor is the senior deputy governor, Carolyn Rogers. Welcome.

Just before we hear your remarks, we do want to thank you for the kind invitation to join you at the Bank of Canada for a tour and an informal conversation. On behalf of the members, we thank you for that.

Members, you should all have received the invitation from the governor.

With that, Governor Macklem, the floor is yours.

[Tiff Macklem, Governor, Bank of Canada]

Thank you, Mr. Chair. We are very much looking forward to hosting you at the Bank of Canada.

I am very pleased to be here this morning with the senior deputy governor, Carolyn Rogers, to discuss our recent monetary policy report, as well as the monetary policy decision we took at our last meeting.

In April, we maintained our policy interest rate at 5% and we published a revised outlook for the Canadian economy. We had three key messages.

First, monetary policy is working. Total CPI and core inflation have eased further in recent months, and we expect inflation to continue to move closer to the 2% target this year.

Second, growth in the economy looks to be picking up. We expect GDP growth to be solid this year and to strengthen further in 2025.

Third, as we consider how much longer to hold the policy rate at the current level, we’re looking for evidence that the recent further easing in underlying inflation will be sustained.

Before taking your questions, let me take a moment to discuss recent economic data and our outlook for growth and inflation.

In Canada, growth stalled in the second half of last year and the economy moved into excess supply. The labour market also cooled from very overheated levels. With employment growing more slowly than the working-age population, the unemployment rate has risen gradually over the last year to 6.1% in March. There are also some signs that wage pressures are beginning to ease.

Economic growth is forecast to strengthen in 2024. Strong population growth is increasing consumer demand as well as the supply of workers, and spending by households is forecast to recover through the year. Spending by governments also contributes to growth, and U.S. strength supports Canadian exports.

Overall, we forecast growth in Canada of 1.5% this year and about 2% in 2025 and 2026. The strengthening economy will gradually absorb excess supply through 2025 and 2026.

CPI inflation was 2.9% in March, and price increases are now slowing across most major categories. However, shelter cost inflation is still very high and remains the biggest contribution to overall inflation.

Looking ahead, we expect core inflation to continue to ease gradually. The more timely three-month rates of core inflation are well below the 12-month rates, suggesting some downward momentum. But with gasoline prices rising, CPI inflation is likely to remain around 3% in the coming months. It is then expected to ease below 2% in the second half of this year and reach the 2% target.

As always, there are risks around our forecast. Inflation could be higher if global tensions escalate, if house prices in Canada rise faster than expected or if wage growth stays high relative to productivity. On the downside, economic activity globally and in Canada could be weaker than expected, cooling demand and inflation too much.

We don't want to leave monetary policy this restrictive for longer than we need to, but if we lower our policy rate too early or cut too fast, we could jeopardize the progress we've made in bringing inflation down.

Overall, the data since January have increased our confidence that inflation will continue to come down gradually, even as economic activity strengthens. Our key indicators of inflation have all moved in the right direction, and recent data point to a pickup in economic growth.

I realize that what most Canadians want to know is when we are going to reduce our policy interest rate. The short answer is we are getting closer. We are seeing what we need to see. We just need to see it for longer to be confident that progress toward price stability will be sustained.

In the months ahead, we will be closely watching the evolution of core inflation. We remain focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour as indicators of where inflation is headed.

To conclude, we have come a long way in our fight against inflation, and recent progress is encouraging. We want to see this progress sustained.

With that summary, the senior deputy governor and I will be very pleased to take your questions.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor and Senior Deputy Governor.

I'm sure the members have many questions. As you know, we start with the first round of six minutes for each party.

We're starting with MP Hallan for the first six minutes.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Thank you, Governor and Deputy Governor, for being here.

Governor, it's my understanding that each central bank sets its own interest rates. Is there a global interest rate that would impact a Canadian mortgage?

[Tiff Macklem]

Global interest rates do impact Canadian interest rates. Global financial markets are very integrated.

In Canada, obviously, we're very integrated with the United States, so the interest rates in the United States have an impact on us. Because we have our own currency and because we have a flexible exchange rate, we can run our own monetary policies. Our interest rates in Canada don't need to be the same as the U.S. rate or global rates, but there is a limit to how far they can diverge. We're not close to that limit. We have the ability to run our own monetary policy geared to what Canadians need.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

In that vein, we see in the U.S. that the U.S. Fed has held the rate. Yesterday the Prime Minister said interest rates would come down. When you do cut the rate—whenever that does happen—what kind of impact does that have on the Canadian dollar if the U.S. market stays the same and the U.S. holds their rate?

[Tiff Macklem]

The Canadian rate is already below the U.S. rate. We're at 5%. They're at 5.25% to 5.5%.

It's a little hard to say exactly what will happen on the day. It will probably, on balance, weaken the Canadian dollar a little, but a lot of it depends on expectations. If you go back a few months, the expectation in the market was that the Fed might cut before the Bank of Canada. That expectation has shifted. To some extent, that's already built into the markets, so yes, if we move lower than the Fed, that will tend to depreciate the Canadian dollar. That's partly how monetary policy works. A weaker dollar stimulates our exports, so monetary policy becomes less restrictive.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

The Prime Minister said yesterday, as I said, that interest rates will come down. He was sure of that, but his housing agency, CMHC, is also saying that housing starts last year, this year and next year will all decline. In fact, CMHC is saying that we need five million more homes on top of whatever is being built. The National Bank said, “Canadian households should not expect any significant relief from housing cost inflation.”

When you lower that interest rate, what impact is that going to have on housing prices, given that the demand has not gone down and is only increasing?

[Tiff Macklem]

The housing market is very sensitive to interest rates, and right now the policy rate, at 5%, is restraining demand. Obviously it is making the cost of a mortgage higher, which is restraining demand. If we lower interest rates, it will be less restrictive on housing and, other things being equal, housing will tend to be stronger than it otherwise would have been.

In our own forecast, we do have a pretty strong pickup in housing over the course of this year. We also have some increase in housing prices. We also expect that supply, while it isn't going to grow quickly, will be growing gradually, and so the gap will be narrowing, but I would agree that it's definitely going to take some time to close that supply shortage.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Respectfully, Governor, I don't think you fully answered that. We already have a supply shortage in housing. We see a rise in demand. Isn't that correct?

[Tiff Macklem]

I agree. Yes, we have a supply shortage. There's no doubt.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

According to CMHC, housing affordability will not meet what Canadians expect today. According to what you just said, do you have a timeline? Given everything, all the numbers you have today, what kind of timeline are Canadians looking at for housing affordability to come back to what it used to be in Canada?

[Tiff Macklem]

Housing prices went up a lot throughout the pandemic. They went up 50% in two years throughout the pandemic. They came down about 15%. They're back up somewhat now, so they're net down about 10%.

We're not really in the real estate business, but our own forecast is that housing prices will continue to move up gradually, so I don't think you're going to see a big change.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Is there a fear that a cut will increase demand further, which might also push up the shelter inflation?

[Tiff Macklem]

That is a risk. We do highlight that in our report. I think, in our own—

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Is that more of a possibility than not, given that housing starts are decreasing?

[Tiff Macklem]

In our forecast, as I said, we built in a fairly strong growth in housing activity throughout this year, and we built in some increase in prices. We took that risk on board in our base case projection. It could be even stronger than we expect, and that is a risk we highlighted.

I just add that the housing sector is an important part of the economy. It's an interest-sensitive part of the economy. It's certainly something we watch very closely, but we need to run monetary policy for the whole economy.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Hallan.

Now we'll have questions from MP Baker.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thanks very much, Chair.

Governor and Senior Deputy Governor, thank you for being here at the finance committee again.

Governor, I'm going to ask you the question I ask you every time you come to committee. It's the question I get asked by my constituents in Etobicoke Centre more often than any question when it comes to your role as governor.

When are interest rates coming down?

As you know, and as we've discussed at this committee before, folks are struggling for a range of reasons right now. The cost of living is high. Housing prices are high. There are a lot of folks who have mortgages on a variable rate or they had a fixed rate and they've had to renew at a much higher rate. That's been very difficult for a lot of folks to bear. Some have had to move out of their homes. Some have had to make significant sacrifices to make those payments.

That's the underlying reason I'm asking this question. I'm wondering if you could do your best to share that with me and I will share your response with my constituents.

When are interest rates coming down?

[Tiff Macklem]

I appreciate that you are sharing the concerns and the perspectives of your constituents. We also survey Canadians. We do hear directly from Canadians, and that is an important input into our monetary policy decisions.

At our last meeting a couple of weeks ago, we did discuss when it would be appropriate to reduce our policy interest rate. As I outlined in the opening statement, we were certainly encouraged by the progress. We do see renewed downward momentum in underlying inflation. For a while, it had kind of stalled. We do see renewed downward momentum.

If you go back to what we said in January and March, we indicated then that we were looking for further and sustained easing in underlying inflation. What we concluded a couple of weeks ago was that we have seen further easing. What we're really looking for now is for assurance that it is sustained.

The message to Canadians is that we are getting closer. We are seeing what we need to see. We just need to be confident that it will be sustained.

We're very conscious that we don't want to keep monetary policy this restrictive for longer than we have to. On the other hand, getting inflation down as much as we have has been a hard-fought battle. We don't want to cut too early or too quickly and jeopardize that progress. We are trying to balance those two risks.

We're going to take our next decision on, I think, June 4. Then we have another one in July and another one in September. We take our decisions at the decision date, based on the best available information we have at the time.

I'm not going to predict what we're going to do at each decision. We'll do our best for Canadians when we get there.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

I appreciate that.

When you say you're looking for signs that inflation is sustainably coming down before lowering interest rates, can you talk about what kinds of things you're looking at? What are the kinds of things that Canadians, like my constituents in Etobicoke Centre, should be looking at to believe that things are heading in the right direction or not?

Ultimately, they want to see you lower rates.

[Tiff Macklem]

That's a very good question.

The first point is that headline inflation—CPI inflation,—is probably going to bounce around from month to month. The latest reading is 2.9%. It will probably stay pretty close to around 3% for the next several months because we know global oil prices have gone up and gasoline prices have gone up. That has a very immediate effect on CPI.

We're looking to see, when you strip that out, that our measures of core or underlying inflation continue to move down. Watch CPI-trim and CPI-median. Those are our two preferred measures of core.

In practice, those are our preferred measures of core for good reason, but there are other measures of underlying inflation, like CPI excluding energy and CPIX.

In our monetary policy report, you'll see that there's regularly a chart of the proportion of CPI components rising faster than 3%. When inflation was 8%, that was as high as 80%. The latest reading is 38%. Normal is about 25%. We're not quite normal yet, but we're getting there.

We're looking for inflation to come down and for it to be less broad-based. We'll be trying to look through the volatile components in headline. We're focused on the underlying measures.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you for that.

In your previous appearances here at the committee, we talked about fiscal responsibility and its role in cost of living and the broader economy. I saw that after the budget was tabled, you made comments at the IMF spring meetings, I believe, about the government's fiscal guardrails and how committing to those guardrails is helpful.

As we see core inflation continue to come down, can you expand on those comments about how Canada's fiscal position has not really changed since the budget was presented?

[Tiff Macklem]

I guess the first point to make is that the federal budget was tabled after our latest forecast, so it is not included in the latest monetary policy report. Most provincial governments tabled their budgets ahead of our monetary policy report, so they are included in the forecast. Also, a number of provinces increased deficit finance spending. That is reflected in our forecast. It increases the contribution to growth from governments overall. Increasing spending and fiscal deficits when we're trying to get inflation down is not helpful.

The federal budget, as I said, is not included in our forecast. We will update our forecast in July and include it. Looking at the federal government, what you see is that spending is also up, and this is largely matched by an increase in revenue. Revenue is higher because the forecast for growth is stronger—which generates more tax revenue—and because there are some new fiscal measures, the most significant being the increase in the inclusion rate on the capital gains tax. The combined effect of these is that the fiscal track—by which I mean the track of deficit to GDP and debt to GDP—has not changed significantly from a macro perspective since the fall economic statement.

Yes, we'll have to look at the various measures. Different measures have different fiscal multipliers. However, at a very macro level, there's more spending going into the economy and more tax revenue coming out of the economy. The net effect from a macro perspective probably won't be that big, so I don't expect it will have a material impact on our forecast.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you.