Central banks must balance controlling inflation from external energy price shocks while supporting economic growth, using tools like core inflation monitoring and flexible policy rates to prevent temporary price increases from becoming persistent inflation.
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Interest rates and Inflation: What the Bank of Canada just told the SenateAdded:
Dear colleagues, it's with great pleasure that today we welcome Mr. Tiff Mlan, Governor of the Bank of Canada and Miss Carolyn Rogers, senior deputy governor. Their appearance before the committee underscores the importance of sustained institutional dialogue between Parliament and the Central Bank of Canada, especially at a time of economic uncertainty and heightened expectations amongst us. Thank you. We know that you're very busy, but it's a tradition for us to hear from you about monetary policy. So, on behalf of all members of the committee, thank you for accepting our invitation and for keeping your commitment towards accountability and transparency when it comes to explaining the bank's decisions. Mr. Governor, I think that you have an opening statement to share with us and after that we will move to the question and answer period. Thank you and welcome.
Thank you, Mr. Chair. Good afternoon.
I'm very happy to be here with the senior deputy governor to talk about the last the decision of last week and monetary policy >> rate at two and a quarter% and we had three main messages. First, Canada's 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% t target 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.
And 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. So let me expand on the economic outlook, the risks and the implications for monetary policy.
Like our previous forecast in January, the war in the Middle East has sent global energy prices much higher, has increased financial market volatility, and disrupted shipping for fertilizer and other commodities.
This has lowered the outlook for global growth while increasing inflation. In Canada, growth seems to have resumed after a contraction at the end of 2025.
Consumer and government spending are contributing to growth, while US tariffs and trade uncertainty are slowing exports and business investment.
The labor market the labor market is soft with the unemployment rate remaining in the 6.5% to 7% range. This reflects both weak hiring and fewer job seekers.
In our forecast, the bank projects that the economy will expand by 1.2% in 2026, 1.6% 6% in 2027 and 1.7% in 2028 and growth in exports and business investment gradually will resume after that.
Before the beginning of the war, we thought that inflation would stay close to the 2% target. But because of much higher gas prices, inflation is rising.
Consumer price index based inflation rose from 1.8% in February to 2.4% in March.
So far, there are little signs that show that higher oil prices have impacted the price of other goods and services more broadly. But it is early days and we will be watching this closely.
Based on recent expectations for oil prices, inflation should reach 3% in April and ease back to target by early next year close to the 2% target over time.
The monetary policy needed to achieve this will depend importantly on what happens with the Canada US Mexico trade agreement, the conflict in the Middle East, and the impacts of US tariffs and energy prices on our economy.
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 US tariffs will remain at current levels. If this holds true and the economy evolves broadly in line with the base case projection, changes in the policy rate can 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. And if this starts to happen, there may be a need for consecutive increases in the policy rate. Of course, these aren't the only possible outcomes. As the outlook evolves, we respond as needed. And with that, >> and with that being said, Mr. Chair, we're happy to answer any questions from the committee. Thank you, dear colleagues.
Maybe six minutes for the first round and then we shall see for the second round starting with our vice president, vice chair, Senator Veroni.
>> Sure, and welcome governors. um you know the conflict in the Middle East and the rise in prices of gas. I mean we tend to think it's far but it has changed my spending habits. It's changed my personal vacation habits u and my purchasing habits in terms of of where we wish to purchase goods. And even of late, I mean, I got a a a search charge on my Amazon account for a delivery. Uh it's it's it's real. Um even now in our hospitality business as we buy, we're seeing the search charges for delivery being quasi permanent. So at what point does it break? And I take your comments to heart that it's something that you are monitoring uh 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 and when habits are changing uh the world is different. So guide us tell us where you think uh that that breaking point is from temporary to permanent.
Well, actually, I think I think your guidance was was pretty good there. Um, I mean, a couple comments. First of all, look, we know higher gasoline prices are are impact Canadians, and that's on the back of already high food price inflation. Food price inflation's been running around 4% for a number of months now. Uh, and you know, the these these are necessities. People people need people need them. Um, you know, as you pointed out, I mean, the these, you know, these price increases largely reflect global developments. Um, and you know, what we're seeing once again is we're all connected. It's a global economy. We're very connected. Yes, it's far away, but affects, you know, events far away uh are affecting global prices, and that's impacting everybody in Canada. Look, the best thing to that could happen here is that you what's causing these price increases could go away at the source.
But of course, that's not something that any of us have any control over. What can the Bank of Canada control is, you know, what we can do is we can ensure that these price increases don't be spread to to other goods and services and then that spreads to other goods and services and then becomes generalized ongoing inflation. So um you know then the question is okay so when is that um it isn't really something we can put on a calendar there isn't a timeline it's going to depend on conditions so one of the things we did in our monetary policy report is a a key element of this is what happens to oil prices themselves you know if they go up and they come back down uh inflation will go up and it'll come back down but if they go up and they stay up, the risk that it starts to spread to other things starts to go up. It's the risk that it starts to spread. So, we're going to need to see, you know, what happens with oil prices. And, you know, to be frank, every day there are new developments.
You know, over the last 24 hours, there's speculation there may be a peace agreement. Oil prices are down.
You know, I don't know what's going to happen tomorrow. Uh, we'll see. Um so you know we need to see how this evolves. Um then we need to see how it spreads and and perhaps what I could do here is give you a sense of what are the things we would look at to know when it's spreading. So obviously I mean our target is for total CPI inflation and there's a good reason for that. That's reflects the basket that people consume.
Um but core inflation strips out the volatile components. So, so far total inflation's gone up, but core hasn't really moved. If you started to see core inflation, which stretchs out the volatile components, if that starts to goes up, that suggests things are broadening. It's not the the direct one-off effects of higher oil prices.
It's other goods and services. We also look at the whole distribution of price changes. So, in the monetary policy report, there's a chart of the percentage of CPI components that are rising faster than 3%. recently that's actually been coming down but if you start to see the percentage that are rising more than 3% going up that's a sense that it's spreading so those are some of the things we would look and if we start to see sign of spreading yes we're going to be getting more concerned >> I have one minute including the answer >> okay so why don't I ask the question you get to think about it in second round you may want to answer it u living in Canada's largest urban center in Toronto you know, it becoming more and more prevalent that every time I go to the hairdresser, they ask if I pay cash or credit. And if I'm paying cash, the still the the till stays open, so to speak. It's not being reported. If I'm calling for a painter to come finish my paint my basement, you know, the answer is, are you paying cash or by check? If it's cash, I can come tomorrow. If it's by by by check, you got to wait three weeks before I free up some time. At what point in time are you concerned of the proliferation of the underground market and the economy and how big it's actually getting and affecting everything we do in terms of of of trying to live our lives in Canada?
>> Is it possible in one minute?
>> Why don't I think we I think we better come back to it. I don't think it is possible in one minute.
>> We should get a lawyer.
>> Okay. So, I think the second round we will be back. I didn't say I bought.
>> Okay.
>> I just said that's okay.
>> Stay tuned. We'll have the answer in the second round. So, we continue with Senator Freandler to be followed by Senator Lafredo.
>> Thank you. Uh, welcome today. I I think I'm moving off monetary policy and I get in trouble when I get the answer. That's not the Bank of Canada's responsibility, but recently um you uh commented in your capacity um as a member of the risk committee with the SFP of your concerns on the private credit market and and you suggested that obviously it's not suitable for everybody, but you also went on to suggest that additional guards might be required and I'm wondering there whether you believe that the regulatory regime that the securities commissions operate in are insufficient to deal with this issue and what might be the impact otherwise.
>> Okay. Well, let me just explain the the comment that you referred to. So, uh look, first of all, private credit has a number of advantages. It it I think it's providing more tailored solutions. It's providing more u more competition, broadening access to credit. uh it it is providing longer term commitments which are are good for borrowers in general uh and if you look at the I mean but but it it there there are some vulnerabilities and private credit and I'm talking more globally this it's mostly in the US the UK Europe there's some in Canada I can come back to that but globally it's been growing rapidly and um you know it it's it's untested in a downturn so there are some concern concerns. And one concern we're seeing is that um while it's well suited for long-term investors like pension funds or insurance companies that have very long-term liabilities um and and can make a long-term commitment. Uh it's less well suited for retail investors who who might want to withdraw their money more quickly. And you're seeing some of that play out right now. So, and and I'll just say, you know, retail investors are not a big part of private credit, but it has been growing in the last couple of years. Um, and I think that's, you know, that's a little bit worrisome because, you know, individuals may want to withdraw their money and you're seeing some problems now where they're discovering that there are limits on on the speed of redemptions.
Um, and so when I said we might need some guard rails, really what I was referring to is this instrument while it has a number of advantages, it's not well suited for many retail investors and there are there are existing uh rules around the suit when you're when a investment advisor is selling something to somebody, they have to make sure that it is suitable. uh and you know we just want to make we may want to make sure that um that that degree of oversight is is happening. Um I I think you know globally um yeah I think we we we need to think about are the guardrails in place adequate? Does there need to be something does something more to have to be done? I I will say I think this this episode right now where um you know people are discovering that they can't always redeem as fastly as they can and as that word gets out that actually might be somewhat helpful in making sure people have have you know fully appreciate all the fine print and understand what they're getting into.
But I mean just to to close the loop, it's very clear that there are a number of uh private lenders in the Canadian marketplace that have closed off redemption and and it it it trickles through to their borrowers who they squeeze and can't accommodate and it on through the system that we get a another real estate catastrophe if there's too much of this uh credit in the marketplace.
>> Yeah, I mean private credit it's certainly present in Canada. Um, it's it it's it's hasn't grown as rapidly in Canada as it has in some other places, but it, you know, it's certainly something to keep an eye on. Um, let me shift again off of monetary policy, but for an update on where you were at in your work on stable coin. I mean, we saw it as being quite important to keep us in the global marketplace with our protecting our currency and our position in the global marketplace. Um it's anticipated it's not till 2027 I believe the reports that this will the regulatory regime will be in place but are we speeding it up? How are we doing?
>> We're working really closely with uh with the department of finance on the regulations. Um it's I mean as you say it's a bit of a fast shifting regime and and in part one of the one of the motivators of bringing a a Canadian-based stable coin regime into Canada was to was to make sure that if there is a growing demand for stable coins that there is an al an option for a Canadianbacked stable coin. Um but to make sure that the regime um is competitive and does allow the level of innovation stuff we want. We're we're also watching regimes that are still under development in other jurisdictions in particular in the US. So so you know the the process of designing the regulations is is well underway right now. We're working as as the entity that's going to ultimately supervise this regime. We're working really close.
Our job is to is to make sure that we can implement the rules and and we'll be able to supervise uh stable coin issuers and stable coin purchasers. So >> early 2027, >> I think so. I mean I it's ambitious, I would say. I think I think I'd be more comfortable with mid or maybe late 2027.
Um but we're going as fast as we can.
>> Thank you. Thank you, Senator Senator Alfredo for six minutes to be followed by Senator Manning. Senator Alfredo.
Thank you, Mr. Chair, and Carolyn Tiff.
Welcome to our committee. Uh, we are currently studying access to capital for small and medium-siz enterprises. And, uh, Governor Mlin, the Competition Bureau recently launched a market study examining financing conditions for small and mediumsiz 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 formemes. Has the Bank of Canada been consulted as part of this work? And 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 uh particularly that are critical to Canada's long-term growth as you know?
>> Yeah. um you know I I couldn't say for absolute certain if we've been formally consulted um by the competition bureau but I mean we work closely with them and our researchers work together so I would be very surprised if they haven't at least tapped into our our research um and you're also aware Senator Pa there's um you know we have the the various bodies um that that deal with the financial sector so we've got Fisk and the senior um senior advisory committee so This is a topic we've talked about in those forums. I mean, my own view, I I come at this from my background in bank regulation. So, I um I always get a little nervous when we use the regulatory regime to incent. I don't think that's the first place you should go. Um but I do think that it is worth looking at the at the regulation and in particular at the uh capital requirements and whether they remain fit for purpose. Um the first objective of capital requirements is not to steer capital. It's to it's to create a buffer for losses. So that's the most important thing to keep in mind. But if we're inadvertently steering capital into real estate, for example, at the expense of small business, it would be helpful to sort of take a deeper look at that. So, which I know is is underway. I know is working with the with the direction that that this broader objective is heading in.
So, we'll see. But, >> thank you for that. I have a bit more time. Three minutes. Wow. Wow. Um, moving on to the CD How Institute. Uh they suggested that current credential frameworks may disproportionately affect what is often referred to the missing middle businesses that are too large for traditional retail lending yet too small to access public capital markets efficiently and they argue that conservative capital assumptions tied to theme lending may at times exceed the actual underlying risk. Do you share these concerns? And is the Bank of Canada working with OSI to assess whether adjustments to capital treatment for theme? And maybe you can further elaborate on what you started lending could support greater economic growth and business investment without compromising financial stability and and you were talking about steering into real estate, but I know a lot of the banks and from experience try to monitor what percentage of real estate lending they do have on their books, but any comments on that? Yeah, I mean the um what I remember about um lending is that middle uh business, they don't often have a lot of collateral and we're pretty collateral based lenders when it comes to business lending. Um so what it what happens is it often forces um particularly independent business owners that want to borrow money, they use their personal assets, typically their home as collateral. So what is ultimately a business loan ends up looking on the books of the bank like a a real estate loan. So you do have to kind of um look a little deeper to understand what is business financing and what is real estate financing. Um again I I think I mean my answer on the second question Senator would probably come back to the same thing I said in the first question which is I'm always a bit nervous when we look at regulation as a tool to drive anything other than safety and soundness. I mean that that needs to be its first and and main objective. Now asking your the question of whether um you've got the balance right between safety and soundness and innovation and competition. And I think that's fair. But using the regime to drive competition, to me, that's where you step over.
>> So, one minute.
>> Do I have some more time?
>> Yeah. One minute.
>> One minute.
>> Oh, it's a good one.
>> There you go. How well I've heard so many, you know, I hear it from every side, right? How much how much of the bank lending is determined by uh the Bank of Canada act, by OSI itself? How how much monitoring does OSFI get into bank strategy when it comes to the bank saying hey we're going to lend well we look at bankme lending in in in Canada it's way below OECD is that anything that OSI can uh monitor or get into or dive into or is it strictly bank strategy across the board >> are you talking about the the >> the percentage what sectors they lend to? Yes. Um well certainly it isn't again I would come back it's not the intention of the of the regulatory regime to steer uh lending in any one direction >> the banks >> decide themselves where they get what they get into. Yeah, I mean it's cost of capital, it's market opportunity, it's strategy, it's all those things.
>> If OSI, you know, if OSI 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 know, you need to loan more here or less here. That's not that's not their job. Their job is is is as as Caroline just said, it's it's a credential function. It's sound it's soundness. they're trying to uh protect from you know financial instability.
>> So strategy is strictly determined by the bank itself. And >> thank you Senator.
>> Thank you Senator have the opportunity to welcome Peter from OI in the next few weeks.
We like to meet him regularly just like we like to meet you to meet you regularly. Mr. Governor Senator Manning, six minutes followed by Senator Wallen.
>> Thank you, Chair, and welcome to our guests. Uh, Governor, there's there's a notable divergence between the real GDP growth projections in the government's spring economic update and the bank's own internal projections in the April monetary policy report. The spring economic update um spring economic update projects economic growth to be around 1.1% in 2026 where yours is slightly different. In 2027 you project 1.6% growth while the uh 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 reconcile its own assessment with the broader market consensus reflected in the government's update?
Um well first of all I' I'd stress that yes there there are some differences but broadly speaking uh you know we I think they're 1.1 for this year we're 1.2 two.
So, we're a bit stronger for this year.
Uh our pick our our forecast is economy picks up a little more slowly than theirs. It it's a little strong. There's a little stronger uh in the forward years, but I mean the pattern is pretty much the same. And look, these are forecasts and we'd be the first to admit that there's a fair amount of uncertainty about those forecasts. In fact, the differences probably understate the degree of uncertainty around it. I mean there are some um I mean these forecasts were done by different people. They were also done at different times. The the spring economic update uses an average of private sector forecasts. They were probably done a good month before the spring update came out. Our forecast um you know we were updating it pretty much up to when we published it. So uh we had the benefit of slightly more recent data. That's probably why we're a little bit stronger for this year. Um, as I said, there there's, you know, there's quite a bit of uncertainty about all these forecasts. Broadly speaking, they're they're, you know, they all have the economy growing moderately. Um, they've all got, you know, growth largely being driven by consumption and government spending. They've got weak business investment and exports, uh, with some pickup in in exports and and investment going forward. Um, you know, I think how optimistic you are about that pickup in exports and investment probably has a pretty big impact on um those differences in the forecast.
>> Uh, just want to go on another angle. In your April 2026 monetary policy report, you projected inflation will peak near 3% in April before returning to a 2% target by early 2027, provided that oil prices moderate, and I guess the word is moderate. Uh what contingency measures in is the bank prepared to take if the Middle East conflict escalates further and oil price pressures prove more persistent in the base case projection zones because oil prices as you said are going up and down like a yo-yo and we're just trying to see what what what contingency measures in place they follow the report they moved higher they've come been coming down in the last 24 hours we'll you know we'll see um but I mean the base case is largely consistent with what the forward curve was you know just ahead of when we published the the the MPR. Um the we you know 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 I mean they're kind of polar cases. one they come down fairly quickly. The other is they don't come down at all. Reality could well be somewhere between those.
Uh but the advantage of that scenario where they're flat is you can you can see what flat at a very high rate. You can you can see what what it would do.
And what you can see uh there's a chart in the monetary policy report that shows that the impact on overall inflation is much more persistent. uh and um so you know inflation uh goes up to about three and instead of coming down by early next year it stays around three for a year and a half. The other thing that uh in that in that scenario is in our in our base case and as we explained in the monetary policy report um you know the with the assumption that oil prices are coming back down um I'm not saying 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'd be probably close to where we need to be. On the other hand, if they stay up, um we probably would need consecutive increases in the policy rate uh to to ensure that inflation does in fact come back to 2% target over the medium term.
>> Thank you. Thank you, >> Senator. So, Senator Swin to be followed by Senator Ysef for six minutes.
Senator, >> thank you very much, Chair. Uh one of of course the contributors to inflation is uh government debt, government spending.
Uh and while the overall number came down, there were a lot of things not included in the spring update that were uh high ticket items. Uh 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 guard rails. You actually have to earn it or create it before you spend it. So are you concerned about um that approach to um uh to acquiring debt um the impact on inflation? Can you do you have some comment on that? I I think in the other place you said you were not consulted on this issue. Had you been what would you have said?
>> Look I mean you know the the creation of the sovereign wealth fund that is really you know that is the government's decision. It's it's a matter for the government. Uh you know, we we don't comment on specific fiscal fiscal measures. Um you know, what I will say is uh our monetary policy report came out the morning after the spring economic update. So, um needless to say, you know, the new measures that that were announced were not included in our projection. Having said that, um, you know, I I don't expect that the new measures that were announced would from a macro perspective have have a very large impact on on the outlook. Um, so, you know, I I I don't see I I don't expect when we do update our forecast with those measures in uh in our July that you're going to see much of a change in the inflation outlook as a result of those measures. It might change for other reason.
>> That's a big number though.
>> 25 billion is a big number. Um >> the you know we'll need to see the the details regarding the sovereign wealth fund what over what time frame this is built up. Uh those sort of things. I mean I think at this point it's hard to it's hard to uh provide much analysis.
>> The I have a question about um foreign direct investment. As my colleagues have said, we're looking at uh at these issues at committee. A report that I read recently said 2thirds of the increase or the record foreign investment in Canada in 2025 is actually the result of foreignled purchases. Um and so that kind of goes against the grain of you know sovereignty and creating what do you have any thoughts on the consequences of that if in fact we're saying there's investment coming in but it's all headed toward purchases and foreign ownership.
>> Um I I don't really have a lot to say on that. Um I mean you're also seeing Canadian investment going going to other countries and and that also involves purchases. So you you've really got to look at the at the net flow. What I will say is that um you know I I do spend a fair amount of time uh outside of Canada at various international meetings and certainly what you're hearing from international investors is people are people are interested in Canada. people are looking at, you know, diversifying their international portfolios. Canada looks good. Um, we've got rule of law, a well-governed country, we've got energy, we've got fertilizer, uh, we've got a lot of the quantities the world needs. We've got a vibrant service sector, um, very educated, you know, among the best educated workforces in the world. So, I I think, you know, there is an opportunity for Canada actually to attract more global capital.
What we also hear though what is holding them back and what is holding them back uh has been very long regulatory approvals. Um and basically the message is look if it takes you know 5 10 years to get a regulatory approver. I'm not prepared to tie up my capital for that long. I'm going to go somewhere else where I can get it faster in a more predictable way. Uh I think look you many of these regulations are in place for well-intended reasons. We we don't want to just gut them, but where we can streamline these, make them more predictable, speed things up. Uh I think that could unleash um greater international greater uh Canadian access to global capital.
>> Minute. Um okay, I'll do the same uh thing and you can think about it. on your recent trip to China because you do travel around um and meeting with the the Chinese uh financial working group aiming to improve two-way trade and financial services macroeconomic developments. I just wanted a kind of a a simpler explanation of what we agreed to do with the Chinese.
um I mean what we agreed to do so if you go back to pre about 2018 uh Canada had um an ongoing I think it's called financial sector dialogue with China we uh you know Canada has some uh large financial institutions in particular two large insurance companies that have a long history of uh presence in China uh some of our big biggest pension funds also have significant investments in the Chinese market. Um you know similarly China has invested in in uh things in Canada. Um so really looking for opportunities to expand the mutual benefit the mutual benefits there. Um I think from as you know China has capital controls. Uh, and I think probably what's important for Canadian firms operating in the market is, um, you know, widening those pipes a bit so that the money can flow back and forth more freely. Uh, you're only going to put so much money in if you can't get any money out. So, um, that would be an example of the kind of thing.
>> Back to that then if we get to a second round. Thank you.
>> Okay. And there's a co-chair of Canada legislative association. I'm very interested by that that topic by the way. So moving to Senator Ysef for six minute to be followed by Senator Deacon.
Senator Ysef.
>> Uh thank you chair and thank you Governor and deputy governor for being here. Um you will not be surprised about my question. In any event uh governor Canadian understand the importance of bringing down inflation. Uh this I think we all understand that this has a devastating impact but it's not equal across the board. So that reality is is how it's going to fair when it's you're using your monetary policy to do that.
Who pays the ultimate cost? I mean, many Canadians are still dealing with a cyclical job market. Wages hasn't been stellar in regards to to growth. Um food inflation is still a reality. Finally, we seeing some give on on the rental market, so people are paying a little bit less. But here's a big cost. As you are thinking about how we deal with rising inflation, are you also assessing the impact it's going to have on working people and families across this country?
Because ultimately, you know, most of the people in this room sitting around this table are not going to be the people who want to pay the ultimate price. It's the ordinary people who can't afford to do that. They can't afford that extra half a percent or a quarter percent on their mortgage rate.
How do you assess that given the unequalness in the monetary policy, how would it impact the people as the lease able to pay for this?
>> Well, Senator, um you know, look, I I glad you raised that. Um and you know, we we are very conscious that uh yes, um you know, if you're you know, if you're a new home buyer and you stretch to buy your first house, Yeah. and you've got a variable rate mortgage, Yeah. increase in the mortgage ring to going to hit you very quickly. Um the the other reality though is that you know ongoing inflation that's not going to help anybody either. Um and particularly um when it's you know more in necessities uh it's you know lower income people are are hit the hardest by that. So um I guess you got to look at well what what can monetary policy do and what monetary policy can do is it can ensure that inflation does remain uh low and relatively stable.
You know I think one thing certainly we've seen is going back to 2022 and 2023 uh as you well know inflation went up 8%. And okay, most of the people around this table are old enough to remember the inflation of the 70s, but there there's a whole generation of Canadians that had never experienced in significant inflation. They have for the first time uh in 22 23 and they didn't like it. Uh and unfortunately inflation, it has a long tale. Yes, we brought inflation back down. Inflation's been close to our 2% target for a year and a half now, but prices uh particularly for food have stayed up. Uh, and that's the long tale of inflation. And I think it highlights, you know, that you you just don't want to let inflation get get entrenched. So, look, we're going to do everything we can. The economy is going through a big adjustment. There is a lot going on globally. We're doing what we can to support the economy through that adjustment. We've lowered our policy rate quite a bit. It's at the lower end of our neutral range. Um but you know if if the risks that you know the increase in inflation that that is going to be become permanent go up uh you know the best thing we can do for Canadians is to take action and get it back down.
>> So um you know most of what you're trying to mitigate is from external forces. This is not a result of higher wages. Certainly uh prices do follow of course the increased cost that's passed on and and and you know as an ordinary people people sitting around their table I had nothing to do with this why am I paying the ultimate price for what the bank is doing because they have no other reality. I think my colleague earlier said he's already thinking of restricting his spending and he's not in that income bracket I'm worried about the most. I'm worried about the people who are not at this table who are wondering tomorrow morning, you know, what do we do for food on the plate when, you know, we're going to have to spend another $25 that I don't have. And then the monetary policy is just going to make my life that more miserable. And I think as a country, we owe them an explanation because they are the people ultimately want to improve in in in a job market and and and to a large extent in redistribution of wealth in this country.
>> I mean, look, you're right. Uh certainly the increase we're seeing in inflation now is is driven by global events. In fact, you know, ahead of the war in Iran, inflation was coming down. Core inflation was was coming down. Um but look that you know this is the world we live in. Uh the best thing that could happen is is you know in in so many dimensions.
Uh you know there's peace in the Middle East.
uh we go back to uh more you know the straight of hormuz opens transportation restores production restores the uh but you know those are not things that you know that's what I hope happens but you know none of us have any can have any effect on that the only thing we can do really is look those prices if those prices are going to go up they're going to go up but allowing all other prices to go up is only going to make the situation worse that's what we can't allow Uh that's when the impact, you know, is going to really hit people even harder than it's hitting them now.
>> Time up.
>> Pardon me.
>> My time up.
>> Yeah.
>> Okay.
>> It's it's 15 seconds. So let's see.
>> So for the next speaker, >> thank you. Thank you, Senator Senator Deacon to be followed by Senator McBing.
Senator Deacon for six minute.
>> Thanks very much, Chair, and thanks uh governor and senior deputy for being with us. Um last November the bank issued a report called towards a virtuous cycle of productivity. What a great title and wouldn't it be nice if it was uh on the doorstep. It lists uh creating a better investment climate increasing competition in key sectors investing in talent as being critical to creating that virtuous cycle. You'll be relieved to know that the banking committee findings have align quite well with the bank's report. So that they'll I'm sure bring comfort to your findings.
Um so far this government has been predominantly focused on growing the investments in the in the tangible economy. The greatest source of source of wealth um in the world seems to be in intangibles data and IP stats Canada estimated that over 18 years leading to 2019 that digitally intensive sectors grew three to four times faster than non digital. So 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?
>> I mean the short answer is it's important. I mean the speech the report you're talking about was actually a speech. It was given by our colleague uh deputy governor Visel. Uh was followup to the productivity speech. We thought okay we got your attention. We're going to double down. So he did a really good job of that. Um in a week or two uh another one of our colleagues uh uh DG Alexa will give a speech on AI. Um and so that might come at some of the questions you're asking.
But I mean this is uh this is an area of strength for Canada. We uh we are one of the we have the godfather of AI is from Canada, right? We won a Nobel Prize on this. So this is an area technology, intellectual property, um you know, we have good research universities. This is a strength. So I mean it's one of the areas of investment that I think we could leverage in an effort to increase the investment, increase the capital deepening portion of and the and the multiffactor productivity parts of our productivities. So when you compare Canada to other nations in this regard, other G7 nations and and we've got the a lot of the elements but we haven't pulled them together on the ground in in terms of of that implementation side.
We've got the research uh we've got the thinkers, we create the talent, but most of the talent leaves to apply their knowledge. They don't stay. So when you're looking at 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.
Is that would that be fair? I mean >> yeah I mean it's we we're often we often use the US as a comparison which seems it's a bit unfair I think. um you know you've got the big hyperscalers, you've got an enormous amount of of um of IT investment of of intangible investment in the US. Um I don't actually know how we compared to the other G7. Is this something you know? But I mean >> um well I what we do have some numbers. It it's actually not not the easiest question because AI in particular um a lot of it is not it's not like saying buying just computers or hardware. It's it's a lot of it is more it's more software. It's not all capitalized. So it's actually hard to compare. I mean what what I can say I mean in general terms basically the US is way ahead of everybody and you know we look a lot more like the rest of the G7 XUS I think we're we're all disappointed with our productivity performance we're all trying to figure out how we get more investment um the US really stands out as um >> I mean you know the the big tech champions they're all in the of us uh and basically none of none of the rest of us have one. Um we we are starting to see and and our colleague Michelle Alex Lopez is going to talk about this in her speech. We are starting to see more evidence that um I mean the big payoff from AI isn't actually discovering the new AI algorithm, it's adoption. It's it's spreading it through the economy.
And um once a year when we In our April monetary policy report, we look at the assumptions underlying productivity growth. Uh and so we did that again this April and we have now built in some positive boost of AI uh adoption into Canadian productivity growth. It's not big. It's it's 02 but it's 02 percentage points of growth on average going forward. It actually it's a bit smaller than that in the near term. Builds up over time. Um hopefully that's a low, you know, hopefully that's too low. Uh we could certainly do better than that.
Um but we we we we now we now are sufficiently convinced to put something in.
>> Thank you very much.
>> Round two. Yeah.
>> Thank you. So Senator McBring to be followed by Senator. Senator McB for six minutes.
>> Thank you. Um thank you. I I've heard you uh many times here. You're talking about how, you know, the banks held the the rate at 2.25 um noticing that um and that you're you're watching the price of energy um and noting that it can infect the the the price of other goods and services.
And I'm wondering um for the other increases um is is it art or science? um will will the bank um anticipate inflation of other goods and services or respond? And I'm wondering which indicators would be seen as the straw versus the camel's back.
>> Uh well, I think it's safe to say it's yeah, it's part art, part science, and it's part backward looking and part forward looking. I mean, look, monetary policy, the thing about monetary policy is it it works with a lag. So, I mean, just to sort of spell it out, I mean, if we 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'd wish we hadn't raised them. The other side of that is that if if we if we wait too long to raise them, uh, and inflation goes up and starts to become, you know, sticky or, you know, embedded, uh, it's going to take more work to get it back down and we're going to wish we raised it earlier. So, we got to manage both sides of those risks. We we can't only look backwards because we we have to look forward but the information we have is of course the data we have is always backward-looking. We don't have data about the future. So we try to we we look at you know we take the data apart and and try to look for signs of what might be coming. And as I responded to one of the previous questions, so um you know what we're forecasting is total CPI inflation, but you know we use our measures of core inflation for example that strip out the volatile things to see if so if we start to see core going up with higher energy prices even though energy prices aren't included in core that means that other things are going up. So those are the kind of things we look at to try to get a sense of is it spreading, is it not spreading? I mean, look, we know there's going to be some spreading. I mean, we we know airlines are already putting sir charges. Uh, you know, you're getting delivery sir charges, so you're going to expect to see some spreading, but you know, if that spreading leads to more spreading and more spreading, okay, now we have a problem. One of the Sorry, I was just going to add to one of the only things that the governor didn't mention that is on the list um is we do ask both businesses and consumers what their expectations for inflation are too. Um and we pay particular attention to to to business expectations because what what that can tell us is if they start to drift up that can tell us well they're going to start thinking about that as they negotiate contracts and and set pricing strategy and and that kind of thing. So, so that's another input that's sort of a bit of a leading indicator for us.
>> You don't have any like red line um items or indicators that >> it's as you said, you said it perfectly, part art, part science.
>> Okay.
>> I mean, I think you you know there's a whole range of indicators. None of them is perfect >> and so you got to kind of look at them all >> and you got to come to an overall judgment.
>> I imagine that makes for a pretty stressful job. Um, Carolyn, Carolyn, you were talking earlier about how um, uh, decisions on risk are made with, uh, safety and soundness in mind.
Um, and, uh, Tiff, you were also talking about, um, how that risk needs to be managed and that how you guys look at assumptions um, of growth were with productivity growth.
and my colleagues have talked about the study that we're we're doing on um access to to capital and credit for small and medium enterprises. Um and and we've heard people wonder um about the fact that it's our large financial institutions and pension funds that have uh so much of our um the market capital the Canadian the Canadian market money.
So I'm wondering the sorry that the money um that our large financial institutions and pension funds um is there at the benefit of of policy that that protects that money's growth and also encourages um uh less risk. I'm we've heard some people suggest that um perhaps there would be a new adjustment to policy that would allow for some of that money, whether it be two or three or 4% of that money to come back in and and really um uh activate the growth capital within the country. like as as a player in the um macro sense of of finance in the country. Do you think there's some way that our own our own um financial system could sort of step away from being like um a a risk adverse hoarder and start creating some growth um in its own system by feeding trickle feeding itself.
I'll be interested in what you find in your study because one of the uh one of the interesting data points we have is um we we don't see the problem being a supply problem as much as a demand problem. So we do a regular survey of lenders on uh credit demand and credit conditions and what we're seeing in the data is the demand uh isn't there that we would expect. So so I don't I'm not convinced I guess and I'll as I said I'll be really interested in your study.
I'm not convinced that this is an access or an availability issue. I think it might come back to this um the a broader definition of risk aversion in our business community and and the drive to invest and this comes back to things like competition um trade barriers that sort of thing. So so you know I I I think there's probably a bit of both. we we there there there may be opportunities to fine-tune regulation or or the different types of funds that are available or the um P3 partnerships that type of thing to to get capital moving a bit but but I would encourage you to also look at the demand side for for capital because what we see in the data is it's not there >> thank you senator maybe second one it would be a chance to continue followed by Senator Pupatello. Thank you, Mr. Chair, Mr. Governor, Madame Deputy Governor.
First, I would like to congratulate you for your excellent website because your opening remarks are already are on the website and I think that there's a lot of factual aspects, a lot of data that explains your analysis. In the financial world, that's not always easy. So, I'd like to just highlight that. I have a question on structural indicators that you mentioned.
You talked about the impact of tariffs on the Canadian economy as well as the war in the Middle East and its impact on the price of oil.
There's another phenomenon that I would like to hear you talk about.
What? How do you follow up things that do you monitor this rather? I'm talking about AI.
Sir, you have to ensure that Canadian the Canadian dollar is stable and safe and with AI and the disappearance of paper money, do you think there is a major risk there and are you already taking measures to counter them? And number two, I want to talk about jobs. In your opening statement, you said that there are fewer jobs and at the same time there are fewer job seekers.
With the development, the continuous development of AI, do you think that the impact on the labor market will be more significant?
On the topic of the potential economic growth rate, as I have said, we see AI having a positive impact through AI adoption by Canadian businesses.
Maybe we underestimated its effects, but we think it has a positive effect.
But as you have said, there are risks.
>> In the past few weeks, we have seen more cyber risks, especially with the new version of Claude by Anthropic.
So yes, there are conversations between us and the big Canadian banks and the Canadian cyber security center to make sure that the system is ready for new risks. It's not really a new risk.
AI advancement is not necessarily a new risk, but AI can accelerate how fast one can find and exploit vulnerabilities. And you no longer need to be a expert in cyber security because you can use AI as your expert.
So it can increase the number of attacks.
So you need a system that can protect a system that's efficient, effective, and fast.
So us along with the Canadian cyber risk center, we are talking with Anthropic and the banks to make sure that we are ready.
That's one example of a risk created by AI. Do I still have a little bit more time? I have a follow-up question. On your website, you provide different advice on how to prevent fraud, especially with fake money.
Can you ask the banks to provide the same kind of advice on cryptocurrencies and all other currency that will be created and traded through AI?
You're right that there may be interactions between the different innovations for example crypto AI and quantum may also change everything related to crypto technologies and protections.
So yes, there is a committee that we chair, a committee with the banks to talk about these things to make sure that the system has the best information and that that information is shared to ensure that they have the best plan to protect So if there is an incident, you need to have a system that can respond to said incidents inaudible for the interpreter. The microphone is turned off.
Thank you Senator Pupatello followed by Senator Hankle. Senator Pupatello >> want to ask about the impact of the USMCA and noticed that some of the uh the review that you did so if this happens sort of a remains the same increases tariffs etc. Did you do a review on what our economy would look like in the absence of a USMCA with the speculation that that the US president made not that long ago about the potential of just letting it lapse and did you do that significant black swan exercise?
>> Well, a couple things. One one thing just to underline is um if if the US president doesn't do anything, it it doesn't lapse until I mean it's an ongoing agreement. there has to be some action taken to to actively uh change it. Um so then the question is okay so what could happen well you I mean in order to analyze it you need you needed a scenario okay so what does change it mean so we have done a range of scenarios we published some of them actually in uh earlier monetary policy reports I've also given a number of speeches particularly at the beginning when it was completely unpredictable what what might happen with various scenarios um and to give you kind of a you know an example So I mean right now um there are a number of sectors autos, lumber, steel, aluminum, furniture that are being hit very hard by very high tariffs. Um the rest of the economy is continues to operate under KUSMA. Um so it it continues to operate tariff-free. So actually Canada's average tariff rate is among the lowest in the world. it's about 5% with the US. Um so and and that it applies to you know most you know over 90% of the economy is still operating tariff-free. Um you know if for example the US president were to do what he's done to most other countries and apply a universal tariff across the board. So if you say you know 10 15% uh that would have a very significant effect on the Canadian economy. And so we've shown those you know we've provided some illustrative simulations scenarios where that happens and um you know instead of having you know a negative quarter and then the economy kind of you know getting back to growth admittedly over on a lower trajectory I mean you're probably looking at several negative quarters. So what you know what typically people would call a recession.
>> Can you tell me if you do a review on the impact of the USMCA on other countries? Do you say Canada compared to the EU? How would we align? Do you do any of that kind of work?
>> We we've certainly looked at Well, what we have looked at is how are US tariffs affecting other countries and how are they affecting Canada? And so one thing that actually is quite interesting is that although Canada has uh probably the lowest average tariff rate with the United States, the impact on Canada uh is quite high. Um in fact if you compare countries I'm not I I can't tell you every country but if you take like big blocks like the EU uh Canada uh I mean what you see is that um the impact on Canada is second so the biggest impact is on China that there's very high tariffs on China the second biggest impact is on Canada despite the very low average tariff rate so why is that?
Well, I think the reason that is I mean obviously you know the US exports are a much bigger part of our economy than they are in other economies and our exports are much more concentrated in the United States. But the other important reason is that so most other countries they make stuff and they send it to the United States. The US makes stuff they send it to the other country. Canada and the United States we make things together. We've had no economic border since uh the free trade agreement in 1989. And so companies on both sides of the borders have optimized production with inputs on both sides of the border, things going freely across the border.
For those sectors that are affected, this business model is being seriously disturbed. And so that's having an outsized impact on Canada. So the new Fed chair is unlikely to give advice to his president about the impact of a a deletterious effect on USMCA like the elimination of it or impact of a new tariff across the board. So would our governor general of our bank make a comment on what would happen in the USA's economy should the president make those kinds of changes?
>> Would would I say something about that?
I >> think governors have done so in the past. I wasn't sure who you've been. Um >> well I mean I have I have I haven't haven't spoken to the president about it. It's not my job. Uh but uh I have certainly given public speeches where I have highlighted you know the impacts on Canada. I've also highlighted that this is actually bad for both countries.
>> Numbers to back up what could happen in the American economy and in which sectors in particular? I I haven't no we have not done you know forecasts of the impact of different on the US economy but we certainly have looked at the benefits of free trade between Canada and United States and that how that has benefited both countries and how if you disturb free trade is going to hurt both countries I haven't we haven't done detailed simulations on different scenarios in the US >> okay Okay.
>> So to wrap up the first rounds, thank you, Mr. Chair. Welcome to the both of you.
Mr. Governor, when it comes to your April 26 monetary policy report, you described two simultaneous scenarios for Canadian businesses. Costs are increasing because they are orient they are reorienting their supply chains and their revenue is under pressure because demand for exports have dropped significantly and then you talk about the its impact on inflation. But for ame that that is experiencing both things at the same time they do not think that things are stable. So how can you ensure that there is stability in the world where there are two pressures that are harming businesses.
So we agree that the fact that the US has imposed tariffs, significant tariffs on certain sectors as well as uncertainties surrounding trade policy both have huge impacts.
But the reality is that our trade relationship with the USA has changed and we see that Canadian businesses are looking for new markets for their products.
What do we see now?
We see that exports to the USA have dropped significantly while exports to other countries have increased. But 75% of our trade is with the USA.
So increased trade with other countries have not made up that loss.
But they are diversifying.
When we talk to businesses, when we survey businesses, we often hear that they haven't found new markets yet.
but they send more to their foreign clients that they already have, but they're trying to find more. That takes time. That also entails costs because finding new markets cost money.
So, what are we trying to do from a monetary policy perspective? We know that there is a restructure a a restructuring. We're trying to help the economy during this period of restructuring.
Our main job is still to control inflation, but we are still trying to help as much as possible while ensuring that inflation will remain low and stable.
So once again, back to your April monetary policy report. The report said that before 2015 when the price of gas increased the value of the Canadian dollar increased as well. That's no longer the case. O investments have dropped.
Profits are more distributed as dividends and the value of the Canadian dollar does not follow suit anymore. So, Canadians are absorbing the increased price of energy without a shield that used to be a stronger Canadian dollar.
Does the Bank of Canada consider this as a structural change that will be permanent? And if so, how does that change your monetary policy?
Well, permanent is a big word.
Persistent.
Sure. I don't think that things will change on that. We agree.
If you look at history, when you see the price of gas increase significantly, especially due to strong international demand, that leads to a lot of investment in the Canadian oil industry. and that increases the value of the Canadian dollar. But this time, it's not necessarily strong international demand.
It's rather a drop in supply due to the straight up hormones.
But for many years now, the Canadian dollar has been less sensitive to the fluctuation of the po price of gas than those pre than the previous years.
But yes, it's something that we take into account when we craft our monetary policy.
In the past when the price of gas has increased the trade the exchange rate has increased and that dampens the impact of more expensive oil on consumers.
Now with less impact on the exchange rate there's more impact on inflation. On the other hand, if you are a manufacturer and you export your goods to other countries, the fact that the dollar has not gained in value means that you have not lost competitively, you are not less competitive. So yes, there are the two sides and that's taken into account when we make our forecasts.
Thank you, Senator.
So before moving to the second round, I will allow myself to ask you a question.
I will piggyback on Miss On St. Jame's statement that not only is your website extremely well done, the quality of your research is also very well done and I've been reading them for many years. I'm interested in maritime trade.
In your report you said that in 2016 Canada was number six in the world and now it is number 23 in the number of in terms of tonnage and during that same period the US moved from number two to number three. So how is it that Canada dropped from number six to number 26 23 rather? It's rather because we cannot take in as much tonnage and that most of that tage is going to other ports in other parts of the world. And you said that this may make Canada this may make Canada less resilient economically. Can you just further elaborate? It's something that I had never thought about in the past.
I think that the data that you quoted are related to our ports and yes because there's a lack of investment for our ports.
A lot has to come through the states.
And what we see is that a lot of products from China that enter Canada. Now this is before those American tariffs, those products went to LA and then brought in to Canada.
So when the US imposes tariffs on China now things from China are more expensive in Canada even though we did not impose new tariffs. So what we see we see more direct routes from Canada to China and vice versa to avoid US tariffs.
That's one example of how we can be more resilient and less impacted by changes in the US if our ports had more capacity.
But the question is bigger than just that. It's not just about the capacity of our ports. It's also the capacity of our pipelines, our the capacity of our trucks and our railway network.
Here's the reality.
The US is very close to Canada. So we're very good when it comes to doing north south trade. We have a large country and we did not invest enough to transport things within our country and for export markets.
So if there's better connectivity within the country and more capacity to to export to other places, then we will be more resilient.
We plan for you to be here until 6:15 p.m. Is that still okay with you?
Because I see that there's are a lot of people here around the people around the table who are interested. So dear colleagues, if it is okay with you, the second round will be only four minutes starting with our vice chair. four minutes.
>> Sure. And and I'll go back to where I left off on the last question, but I wanted to add just a little twist and that is I'm not as big as that black hole is and as how would I say the lack of information. I do want to separate out organized crime from that black hole and and and pretty much concentrate just on blue collar, white collar tax avoidance and and countries like Australia, New Zealand and some other countries have deployed a reduction in personal income tax and a corresponding increase in consumption tax to try and batten down that hatch. And they've shown some progress in it. Is that a landscape that we are currently studying and looking to move forward on or at least tracking to see what those kinds of differences are?
>> You're into tax policy which is not our domain. But but I did spend a little bit of time while we were going around the table thinking about how to answer your original question. And I mean in some sense it's a it's not there's a parallel to the question we got earlier about private credit, right? So in general, we like our data. Anything where they're where we've got blind spots in the data, um in the case of private credit, these are largely um unregulated lenders. So all of the regulated lenders, we get tons of data. I was talking about the data earlier that we get when we survey um lenders.
uh when it comes to under the table economic activity, I mean by by its very definition, it's not showing up in the data that we can use to make our decisions. So, um I mean I think that's pretty much all I could say on that. I will say if I sort of widen the lens a bit on your question, I mean we're I think we're we're continually challenged to keep up with uh these types of issues. One that we've been talking about just recently is algorithmic pricing. some all of the different techniques around pricing. So, so again, these are things that we're going to have to change how we measure things and the types of data that we collect in order to stay on top of what's going on in in the economy. The your specific issue, the underground economy, I think that will always be a challenge because I mean its very existence is to not be measured. I mean that's that's why uh most people pay in cash is so that it's not measured. I think is what is the point you're making. Um do we worry about it? Sure. Is it is it an area where we have policy levers to solve it?
No.
>> Unknown.
>> I mean the degree of it is it >> well there are estimate there are estimates. I mean academics have produced estimates of of the underground economy. Um I I I haven't seen the you know the very latest research and I haven't seen research to suggest that it's growing rapidly. I think there there is there is a broader problem um with fraud. Uh and I think new technologies are making it easier for fraudsters to basically scam more people. Uh the Canadian government is standing up a new um agency. What's it called?
>> Uh >> financial crimes.
>> Yeah, financial crimes agency. I mean, I expect it'll take a couple years before before it's operating, but I think I think it is recogniz you know, it's not our job to comment on specific initiatives, but I think this I think there is some recognition. This is a growing problem and we've got to get we've got to do a better job here in Canada.
>> Thank you, Senator Senator Lefredo.
Senator Fredler, Senator F.
>> Thank you. Thank you, Mr. Chair. Um, I'll talk about the equity markets and and the effect on your monetary policy and you see where I'm going. Uh, despite persistent global >> maybe your market, I don't know if it's it's yeah, thank you.
>> I've got this uh telephone on it. Thank you, Mr. Chair. And talking about the equity markets >> and despite persistent global uncertainty and including geopolitical tensions and the list is long, right?
trade disruptions, elevated debt levels, uh global growth projections, slower global growth projections, equity markets have remained uh relatively strong and resilient and and you know, I mean, I understand totally understand the Bank of Canada's role. Uh but the equity markets affect the economy, the economy affects monetary policy. And given the uncertainty, how do you why are they so disconnected with with reality? And is that a concern that you did say that you don't only look back, you look forward. So how would you explain that performance and and are you concerned uh looking forward on those equity markets? I mean, if you look at the evaluations today, they're extremely high. Look at the bank evaluations, they're multiples of I don't verify them every day, but last time I checked, there were multiples of 16. I remember when I was at the bank, there were multiples of nine at times and eight also.
>> Yeah, I mean Carolyn may want to supplement. Um, well, uh, look, you know, it it takes, uh, it takes many views to form a market. Uh, and you know, some people think the market's undervalued. Some people think it's overvalued. Um are you know are we uh do we think there's uh some reasons to be concerned? Yes, we do. Uh we're we we will have a new uh financial stability report coming out end of this month. Uh and we will we will expand on that in that report. Um you know as you say you know conventional indicators PE ratios forward PE ratios are are are unusually high. Um the I mean I think the you know the if you talk to the it's not my my job to explain you know defend the market but you know if you certainly talk to the optimists they're like well earnings are great AI's AI is here it's going to it's going to drive massive increases in earnings and so that's you know capitalized into the current price.
I think others are looking at it and saying, well, yeah, maybe, but maybe not. And uh so, you know, there there's there's quite a bit of downside. Um the you know, from from and and obviously if if you do see a big correction in in equity markets, uh that'll have uh an impact on all our, you know, all our economies. Um you know I think the big question the market is asking is is AI a bubble? Um and you know coming back to the you know this issue of AI as a transformative technology. I mean it is true in over history you know a technology could be transformative and there could be a bubble. I mean you look at you look at the dotcom bubble uh you go back to the railway boom you know 150 years ago. I mean these were periods where you had transformative technologies but they did lead to um you know overvaluation a big correction. So yeah these things can have consequences.
Um it you know it obviously can have economic consequences and if it happens you have to take that into account in monetary policy. You know another one of our mandates though is is to foster uh a stable and efficient financial system.
you know, equity prices by themselves, I mean, nobody wants to see equity prices go down, but um by themselves they don't tend to create financial stability problems. But if you know then there are credit problems and you know credit private credit for example is heavily invested in AI. If there's a correction and that leads to private credit problem, you have other economy slows, you get credit quality issues elsewhere, that can spill in more to the financial system and that can be an amplifier to the downturn. So the financial system now has to delever, pull back from lending. That magnifies the recession.
That's the sort of thing that we worry about and that's why you've got OFI to try to make sure the banks are well capitalized. They've got adequate liquidity. They're not overleveraged. So if that happens they can absorb it and they don't have to pull back and and amplify it. So that is the sort of those are the sort of things we worry about.
>> Thank thank you senator.
>> Mr. Chair >> nice try bec the nice tribe because the last time that the G7 central banker made an opinion on the equity valuation was 30 years ago Alan Greenspan with irrational exuberance market has continued to increase during three years. So you know what so they refrain usually to come in on equity valuation that my conclusion Exactly.
>> Okay. Thank you, uh, Senator Fendler to be followed by Senator Swan.
>> So, moving off off of high-tech to low tech or old school, our resource sector.
Um, it looks like we're refocusing on um improving the supply side. Uh, our pipeline capacity, our export capacities hit its limits, but we're looking at new infrastructure. How does the um hydrocarbon sector and other resource sectors figure into your forecasting um and your policy determinations?
Uh well, it's a pretty broad question.
And I guess the the uh so if you look at government spending um so we look at government spending both how much government spending and what they're spending on. So um to the extent that they're investing in new infrastructure to improve uh transportation to develop you know you know new pipeline capacity new new infrastructure capacity that that does add demand but it also adds supply to the economy. So, um, you know, the supply side and the demand side, the timing may be off, but you know, they're not going to match up perfectly, but over time, the two are kind of going up at the same time. Um, if government is simply is is just adding to demand that, you know, well, if you're starting in a situation where your economy is overheated, that that could be a problem. That's not the situation we're in now. The economy is is is weak. Um, and there's some certainly some excess supply. So there's you know some room to grow more without causing uh inflation.
But as I said, so you know, we're look, you know, we take the government's spending plans and we um we try to assess um you know, how much of that is investment is going to move the supply side and how much of is it going to add to demand and we and that's what we build into our forecasts.
And a return to a a petro dollar will make your life easier um on managing inflation >> to a strong petro dollar.
>> Um well it you know higher oil prices have multiple effects on Canada. Um obviously for households and most businesses you know higher gasoline prices are squeezing squeezing them. So it's going to tend to reduce their spending. Uh Canada has the advantage though compared to many other countries is we are a large net exporter of energy. So when the price goes up there's more income coming into the country. Um so what you see in our in our uh forecast is 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 on you know overall there's not much impact on GDP growth.
Uh there obviously is a very direct impact on inflation.
Cres Warin to be followed by Senator Senator Ysef.
>> I'm just going to come back to AI for a moment because you said Governor that the big payoff uh for AI is adoption but it is adopting itself like it is moving at such a rate right now um that it's breathtaking you know we're way beyond automating tasks. This is automating judgment and decision making and that's already real. So I'm I'm surprised at the sanguin nature of our discussion here. Is this not a break the glass moment?
Uh well I mean when we so we we do you know we do surveys statistics Canada does surveys and when you survey companies you know what what you see is you if you ask them are you using AI yeah most of them say yeah yeah we're using AI and yeah we're probably all using AI. Um, when you ask them, "Have you used AI to significantly transform an important part of your business?" It's still a pretty low number. I'm not It's going up, but it's still pretty low. Um, it may it may go up at an increasingly fast rate. It may go up at a linear rate. I think that's it's hard to predict.
>> Who's who Sorry. Who's ready for this?
Are you ready for this? Is the government ready for this? are businesses ready for this? Like what what's your thinking?
>> Um well just the other thing I'll say that we we see when you talk to companies is it's also it depends a lot what sector you're in. You know some sectors are much you know if you ask the financial sector you get a much higher response rate in their use of AI than say you know some other sectors. Um are we ready for this?
Look, I mean, I I think from a monetary policy perspective, um, you know, we we certainly would 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, 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. Um so but the other side of that is you know how disruptive is it going to be? How how who's whose jobs get deped? Will they be able to find new jobs? Will it create enough new jobs?
These are issues of of very large debate. Um and you know what what we do is you know we look at different scenarios. We we try to we try to plan for different scenarios. Um, you know, there are a lot of other broader questions that go way beyond the Bank of Canada though about are we ready as a country.
>> I think the opportunity for Canada is if we can figure out how to help our small business sector leverage AI. Um, you know, as the governor said earlier, I mean the you know right now the the the advantage that the US has is the investment in AI, but the real payoff in AI is going to be whether it gets used, whether it gets deployed, whether it increases productivity.
um particularly if it does reduce employment, then you really need the the offset benefit. The the Canadian economy is a lot of small businesses and I mean I think when we're talking to businesses right now, big businesses are figuring this out. We're we're relatively big.
You know, we're 2500 people. Um the effort and the the skill and the hiring and stuff you have to do just in our business is you know it's it's a big lift. So I I wonder about small and mediumsiz enterprises and and if Canada can figure out how to like if we can be the so US can be the one that builds it.
If we can be the one that figures out how to use it and how to use it in the small and mediumsiz enterprise sector that would be that would be a gain.
>> You senator Senator Ysef to be followed by Senator Deacon. Senator >> thank you chair. Um I want to come back governor because I mean the reality is inflation is going to be a a challenge unless this war ends soon and oil prices come down. I hope you take the care to explain to Canadians. I mean we know this going to have uneven impact on people and and and I I think there's need to be some reassurance in this regard. So let me ask you the most important question. Um you know a year ago we were having a big debate about how we build one national economy. We're breaking down barriers proincially across this country and and the province in fairness are working with the federal government in a very robust way and we've seen a number of barriers already uh gone. Are you measuring um the scale in which this is happening and more importantly what impact is doing in driving productivity and of course making the economy of course more productive because we know many of these bars had nothing to do with uh the productivity of the country had to do with protecting one's turf. But given that it's coming down, are you measuring it and following it as it's happening?
So we can get a an ongoing assessment as to whether or not the argument has been made was costing the national economy this much. Is it still doing that? And if it's not doing that, then where where's those costs being passed on to consumers that that should be benefiting from this?
>> Yeah, I'll just say, look, I I appreciate your advice and and I couldn't agree more. Um, you know, we we are accountable to Canadians. they, you know, deserve a clear explanation for our actions. Uh, and they deserve, um, you know, our best sense of of where things are headed and and we're certainly, uh, committed to doing that. But why don't why don't you say a few words about the interprovincial.
>> Sure. I'll just add though to that. Um, I I I think you read our speeches and I hope you see that we do try and talk to Canadians. It's a, you know, to be really honest, the point that you're raising is frustrating to us, too. We have one tool. We know that it affects people in very different ways. We know it hits uh low-income people harder. Um, as the governor said, you know, there there's only so much we can do. We feel a huge responsibility to keep inflation in check, but um, in our consultation and in our speeches, we do try and talk to all Canadians. So let me come to your question on interprovincial trade. Um we don't have a I wouldn't say that we're measuring this with um in a lot of detail but there are others that do. So I don't think it's something that we need to the OAC has a has a barometer and then I think in I think the federal government actually also introduced um an interprovincial trade tracking um system in 2024. So um our view on the progress is it it's it remains encouraging. It's it's still an area of of focus. I think the message has has landed that this is sort of an own goal. It's something that's we you know we don't need any cooperation from the US to fix. It's within our control.
Um the the focus early um has been on goods um which is probably the easier thing to tackle. What we do need to to see is some more progress on on trade or services, labor mobility. Um, you know, you you um if you're an architect in one province, you should be able to work in another province without having to rewrite your exams and that that kind of thing. Um, I'm a CPA and and we have I don't know how many different CPA bodies across this province. So um so so more focus on labor mobility I think would be the the next thing that we'd like to see. Ultimately though the the other uh the other I think advice we would give is is to keep the objective in mind. The objective is to remove barriers to remove frictions for businesses to make it easier for them to do business um across borders. And oftentimes what we see happening is is the in an effort to try and solve these problems, you have governments that introduce and and and additional agreements and and you know more rules that are are designed to get rid of barriers, but they just add sort of layers of of administration for businesses to go through. So, so the objective, you know, if you keep the objective in mind, it should be to to to remove things, not add things to make things easier, to remove frictions and then as I said, a bit more focus on on labor services.
Senator Deacon to be followed by Senator Petilu. Senator Deacon, >> thank you chair and thanks again for being here. Um it's estimated that 99% of the global uh stable coin market 250 billionish is pegged at US and US dollars. Canada has passed the stable coin act. You indicated that perhaps in sometime in 2027 we're going to see the legislation in place uh or the regulatory framework actually in place and working. But the market is continuing to move at a a pretty rapid pace. We saw Tetra and Alberta launch a Canadian dollarbacked stable coin and well simple announced yesterday a deal with Visa to start testing a U US dollarbacked stable coin for settling transactions in Canada. From a monetary policy perspective, if US backed stable coins start to trans transactions start to increase traction in Canada and increasingly adopted in Canada, is there a point that might set off an alarm at the bank uh to speed things up to get moving a bit bit faster?
>> And in the meantime, will the bank be working to ensure that we have a competitive Canadian dollarbacked payment rail?
So I mean on that I would say um obviously 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. Uh and honestly you know frankly it it's an open question just how big stable coins are going to be. Uh I look I think it's it is very important that we have a a very high quality stable coin regime in Canada. If stable coins are going to be big, we definitely want to have Canadian dollar stable coins. Uh we are moving, we are working hard with the department of finance to get the regulations. Um, and you know, one thing I would mention is, uh, you know, we've been given a number of new responsibilities, as you know, well, oversight of the retail payment system, open banking, um, uh, or consumer-driven banking as the government calls it, uh, in addition to stable coins. And although these are all different, a lot of the players, they're the same players. We need similar systems to oversee these. We're trying, you know, the advantage of putting it in one place in the Bank of Canada is that there's synergies from our perspective in providing the systems to to do this also will be easier for the market players.
They will they can come to us and you know they dealing with one player for multiple uh multiple different things.
So that should help us go faster. Um and it should should make life easier for the private sector. Um but you know coming back to um you know I I think it's an open question how big stable coins become. um I mean are they a stepping stone to tokenized you know tokenized deposits um and so the other sort of things we're doing uh you may have seen we're we're experimenting project Samra for example uh using um basically general ledger technology in in central bank money to facilitate wholesale to you know facilitate wholesale um wholesale transactions um and you're going to see more of these types of So, we've been doing these types of pilot experiments to get different technologies working. We can't do it by ourselves. I mean, that one was a a joint initiative with EDC and and two of our large banks here in Canada.
You're going to see more of those to try to try to accelerate accelerate. Um, but I think I don't like I don't think you can sort of put all your eggs in one basket like this is going to be the technology, go hard on that one. We're going to have to stay nimble.
Senator Senator Petilu.
>> Thanks. Uh in my earlier question, I was looking for uh um whether there would be work done in your shop around the economic impact of a uh again more tariffs etc on the American economy related to the USMCA and our relationship between Canada, Mexico and and the US if there is an opportunity to do some of that. So if uh 15% across the board this would be the impact if a 5% because all of this is out all of this activity is outside the USMCA now anyway um they've already abregated the the agreement um but I'd like to ask about by Canada you mentioned in in the last report that it was it had some mitigating factors uh in Canada you tell us about how much and because it's sort of just getting going do you anticipate that the more um the procurement policy for example, on on Canada buys in procurement for the Canadian government as that starts to roll out, what could its eventual impact be that might be even more mitigating?
>> Um, well, just, you know, coming back to your first point, I I just I want to stress that, you know, the Bank of Canada, we don't do trade policy. Uh, you know, trade policy is really correctly, you know, in the hands of of elected governments. Um and I know you know government officials are you know engaged with the US government with you know with uh you know state byst state uh in Washington you know ma may you know making these points but that's really you know their job. It's not it's not really appropriate for the bank of Canada to weigh in on u Canada US trade policy. Our job is to understand what are the impacts here in Canada what that means for monetary policy. So that's that's our focus. on your second question about buy Canada. Um it it's actually a very hard thing to assess analytically. I mean we can see I mean how do you measure people's change in preferences for American or Canadian goods? Um so I mean I think there's some places where you can see it in the data but of course you know there's a lot of other things that are affecting the data. So we have no way to measure directly what is the the effect of by Canada. I mean I mean the obvious place where you can see it is you can see like you know Canadian trips to the United States uh you know Canadian tourism to the United States is down. It's up to other locations Mexico, Puerto Rico. Um so there are some you know you can see some shift in preferences and then you know airlines are changing their flights. So there are some things that are where you can see it directly. I think when move beyond things that are just so clearly American it's it's very hard to measure.
>> I can't really give you an answer.
>> Yeah. Somewhere in your report you you mentioned the by Canada policy as a mitigating factor and my question >> direction but but we can't really give you a >> and we can see it in certain very clear things but we can't really give you an overall number.
>> Okay. So is there any marker that you would put as a goal that you would say if this then that and and by the way I asked the financial officials as well are they setting any markers to show that when they enact these policies they can see the difference beyond cellular to tower data that you that's referenced in some of the articles you know >> um yeah I I I I'm not sure that we have a very good way to measure it when you you know as we see the impacts in Canada we can we can take those into account and you can try to sort of extrapolate forward but um we don't have any kind of index of by Canada that you can then link to what you see in the data senator uh colleagues we have around 12 minutes left I have a question myself other senator 122 bean cbin it's okay but I think we'll have time So maybe a third round. So to conclude this second round, I will have my own question. Okay. U finance minister make a big deal that the foreign direct investment in Canada has reached 20 year high per capita is twice a US. But what is have you drilled the number? What is this foreign direct investment? Is it the fact that the foreign ownership in Canada going up because foreigners buy our Canadian firm not really invest? Uh is it because the IP is sells to us? In fact, is it positive or as much positive? What is your reading or is it the foreign companies invest in the Canadian subsidiaries? I have not time I have not really checked the numbers and you have a bunch of good economists I think in your in your Bank of Canada.
what is your reading uh regarding that?
>> I don't have a detailed breakdown of that in front of me so I'm afraid I can't answer your question.
>> Okay. Okay. So nice try from my side.
Okay. So to have that but it's just that for me when I see the they mention Canadians funds including pension fund are stepping up and working with government with new project maybe in the future but so far Canadian pension fund invest much more abroad than the opposite. So I was just curious if you have any written answer down the road I will take it. Uh so Senator Lefreda >> um so debt levels are important and uh you know it's always capacity to repay that we look at not just the level of debt but you hear a lot of different stories when we hear the government we hear net debt to GDP we're outperforming the whole world. Um I was at uh World Bank and IMF conference and I heard some of the opposition say well if we look at the gross debt it's not the same story as chair of the World Bank and the IMF for Canada we're going to CC you and we're going to um clarify that position uh with respect to gross debt over GDP and are you concerned about our debt levels and to what extent are we outperforming the world when it comes to uh financial performance uh is is and we all know how it's calculated right the gross debt list are pension funds which a lot of the countries don't have those pension funds right Europe doesn't have them it's pay as you go right we do have them so as a CPA myself I I think it is an asset and I think it's fine to put net debt over GDP but what what are your thoughts on that and what's your concern with respect to monetary policy when it comes to net debt or gross debt. Are you concerned about our gross debt and the provincial debt when it's added to all that? So maybe we have a little more time, Mr. Chair. So I think that's a good question, right? I can start and and and maybe this maybe the CPA will uh supplement my answer. But I mean I I think whether you look at gross debt or or net debt depends a little bit on what the question is. If you're looking at the sustainability of your debt, uh you're right, having a actuarily sound pension systems an asset for the country and that should that should factor in your sustainability. uh if you're looking at um you know what your funding requirements are on an ongoing basis and how much is rolling over every month and and you know what would happen if there was a a freeze up in global markets and there's like a liquidity crisis you you got to be thinking about your gross debt uh because that's what you actually have to roll. So I mean there you know again it depends what it depends what the question is. I mean typically people are looking at sustainability and in that sense I would say net debt is is is a better number than gross.
>> But but are you concerned about our debt levels? I mean here you know I I I see the opposition putting the uh trillion dollar number on on the screen to kind of scare off uh the the viewers. Uh how do you view our our debt level and uh and and moni and future monetary policy with respect to the economy?
Look, you know, I I generally don't comment on fiscal policy. If I thought our debt level was unsustainable, uh that would, you know, that would be impinging on monetary policy and I'd be talking about it. If I thought government was spending so much money that we couldn't, you know, control inflation, I'd be talking about that. Uh but, you know, I I don't think our debt is unsustainable. Canada still has a AAA credit rating. Uh I certainly hope we can keep it. Um but um you know in relative terms uh Canada looks pretty good compared to a lot of other countries as you said. Um and you know we we run the auctions for Canadian government debt. They're certainly well covered. They've got minimum uh tails.
So I'm not seeing any uh you know any immediate issues.
Thank you, Mr. >> and Senator Deacon.
>> Glad to be the uh the cleanup hitter on a great meeting and thank you again for being being with us. Um when you look at foreign direct investment going into intangible assets, there's the it's great because it's there's no economic leakage. It's it's you can really calculate the benefit to the economy, but it when we're investing in intangible when they're investing in intangible assets, there's an awful lot of economic leakage associated with that. And so, how are you managing that in your own calculations in terms of of the benefits to the economy and where you see that that moving and and the risks and and opportunities associated?
>> You might have stumped us.
Um well I mean I guess what I would say is that um you know whether you're Statistics Canada or you're the Bank of Canada trying to feed this into your models um you know measuring intangibles is is much more difficult. Um so I mean you know CIS Canada does their best. we, you know, we we do our best in our models, but yeah, you've got to be aware that, um, you know, we're probably doing a better job of measuring physical than intangibles.
And, um, you know, as as intangibles become more important, that may becoming a bigger problem. Um, so I'm not sure I have a very good answer. Uh, but yes, I mean, I think it it it's another kind of source of uncertainty.
um coming down to measurement.
>> So I don't I don't want to be putting words in your mouth obviously, but can I take from what you're saying that the growth of intangible investment in this country and and the economy the growth of intangibles in the economy are increasingly important as we move forward and that it is there is a risk that foreign direct investment if not if it doesn't focus mainly on tangible there is a risk that there's a lot more leakage. there's evidence that there's a lot more leakage and that that is something we probably should start to take some time to look at and and get some some parameters for evaluating that uh from so that to help guide our fiscal policy uh because right now I I don't see I see FDI being celebrated no matter what and I don't feel that as just from a policy standpoint and so I I think we need some tools there. I can say two things very quickly. Look, we need more investment in physical. We need more investment in intangible. It's not one or the other. Uh we need both. We've we've had chronic underinvestment for a long time. Um and my second comment is yeah, if the Senate wants to take this on, uh you we're we're right behind you.
>> We'll wait for we'll wait for your report. We may have questions.
>> So, thank you. Thank you, Senator. So, Governor Mlam, Senior Deputy Rogers, as usual on behalf of my colleagues, I want to I wish to extend our sincere thanks for appearing today before us. Uh it's always always informative this kind of session. We appreciate your time. So, uh see you uh I think would be probably after summer next time. So, dear colleagues, uh the next meeting will be tomorrow, Thursday at 10:30. So uh on on behalf of my colleagues I want to thanks as well our interpreters as usual and all the logistic behind us. So I declare the meeting a journ.
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