May 2, 2024
Bank of Canada Governor Tiff Macklem defended the central bank’s two per cent inflation target as the key benchmark for setting interest rates on Wednesday under questioning from Canadian senators on the standing committee on banking, commerce and the economy in Ottawa.
Committee chair and senator Pamela Wallin asked Macklem, who appeared with senior deputy governor Carolyn Rogers, why the central bank doesn’t simply raise the target to three per cent, close to where inflation now sits after a series of interest rate hikes over the past two years. Macklem responded: “Why not four per cent, why not five per cent? If you’re going to change your target when it gets difficult, you don’t have a target.”
He said the measure, which has been in place since 1995 and is reviewed every five years, has served Canada well, including recently following major shocks to the economy from the COVID-19 pandemic and rising geopolitical tensions.
“It’s what anchors expectations,” Macklem said. “I don’t think, on the fly, you want to throw the towel in because it’s tough.”
He maintained his message that central bankers need to be assured progress to tame inflation will be sustained — and that the target will be reached despite a strengthening economy — before cutting the overnight interest rate from five per cent, the peak reached after a series of hikes from just 0.25 per cent in March 2022.
“I realize that what most Canadians want to know is when we will lower our policy interest rate. What do we need to see to be convinced it’s time to cut?” Macklem said in his opening statement to the senate committee. “The short answer is we are getting closer. We are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained.”
Senior deputy government Carolyn Rogers told senators the central bank is expecting more shocks in the future, with demographic shifts and rising geopolitical tensions that could impact consumption and saving patterns, supply chains and commodity prices and make inflation harder to control.
She said that is why she delivered a speech in March calling Canada’s productivity lag compared to other G7 countries a break-the-glass “emergency.”
Rogers and Macklem pushed back on the role of monetary policy in the productivity lag, pointing out that it has existed for 20 years, through both historically low and rising interest rate cycles.
“Interest rates and monetary policy do have a bearing on demand, not so much on supply — and policies that focus on supply (including productivity), that is going to be increasingly important going forward in Canada,” Macklem said, adding that this falls within the bailiwick of governments and companies rather than central bankers.
Later in the hearing, he said governments could improve the productivity of their own operations by investing in technology and skills to make them more efficient.
Rogers said reversing Canada’s productivity trends will require policy action at all levels of government and in the private sector. She reiterated themes from her March speech, including suggesting that increasing competition in concentrated industries and easing inter-provincial trade barriers could boost productivity.
Senators asked the central bankers to give their views on the federal government’s recent budget pledge to increase the capital gains inclusion rate for corporations and individuals above a certain threshold, a measure that has prompted backlash from venture capital and private equity players who say it will cause innovators to leave the country for friendlier tax jurisdictions. They declined to comment, with both Macklem and committee chair Wallin telling the senators that it is not the role of Bank of Canada officials to opine on specific government policies.
Senators also questioned the central bankers on whether monetary policy had pushed Canada into a housing crisis with a large swath of mortgages set to renew at much higher interest rates. Rogers said that while headlines on the subject can be alarming, even to her, the data so far shows Canadians are managing higher rates and preparing for the renewals of mortgages taken at the lowest rates in 2020 and 2021.
“About half the mortgages (in the category) have renewed,” she said, adding that despite the sharply higher interest rates, default rates remain at historic lows and arrears, while higher, have only come back from lows during the pandemic to pre-pandemic levels. More stress is apparent in the rental market, she said.
“The data is not telling us so far that we have a mortgage crisis, as the headlines would tell you,” Rogers said, though she acknowledged that the difference between rates at origination and renewal will be larger for the mortgages yet to renew.
“What banks are telling us is they are reaching out proactively to those borrowers, and most of them are preparing. We do see people holding more savings,” she said.
