Welcome back everyone for our second hour. I'm glad everyone could make it. We have the Bank of Canada in today. The senior deputy governor Carolyn Rogers. Thank you for coming in today along with Kalia Belo, managing director and chief financial officer accompanying the deputy governor. There is no opening statement to begin. So I'm going to begin things right away. Mr. Shear, you've got the floor for six minutes, please.
Mr. Chair, it's a pleasure to welcome you here to the committee this morning. Ms. Rogers, you wrote a piece on productivity that I'd just like to ask a few questions on. When I look at the last budget that the government tabled and I see the eyewatering amount of money that Canadian taxpayers have to spend on debt servicing costs, in the last budget, it's $59 billion that the government of Canada is going to spend just to pay the interest on the debt. That's more than healthcare right now. It also stands in stark contrast to the commitments the government made about a year ago where the deficit would only be about $30 billion. This budget has come in at well over $60 billion worth of deficit. So my question is, is all that money that's being spent on servicing the debt acting as a drag on productivity? Because that's money that could, if that money came down, if the government had to spend less money on debt servicing, that would free up money for tax cuts, for investments in actual infrastructure. Would you agree that that money spent on debt servicing is having an effect on productivity?
Well, I mean, I think your point that money that is spent on debt servicing could be redirected to other things is accurate.
Okay. The bank also has warned recently, I think it was just a few days ago, about high risk of volatility in the future. When interest rates go up, that also affects the government's debt servicing cost. Do you have any kind of estimates about, you know, if interest rates went up a half a point or a full point, what that would do to the amount the government spends on servicing that debt?
I don't have that number at my fingertips. No, I mean, we're here today to talk about our own financial statements.
Okay. All right. Well, I appreciate that. On the financial statements, the bank had announced last year that it was ending the quantitative tightening phase of its settlement management, but it still has about I think $150 billion worth of government bonds on its balance sheet. So what is the timeline for normalizing the bank's balance sheet position? Other central banks are trying to get those increases in settlement balances off the books and the Bank of Canada seems to still be at about $150 billion. So, is there a timeline on moving that off or is that where the bank is comfortable?
Yeah, I mean, I think we've pretty well completed the normalization process. I think our balance sheet is kind of settled into a steady state position. Settlement balances will move in relation to a couple things. They move in relation just to the overall size of the economy. They move in relation to regulatory capital requirements. There's a number of reasons that members of the payment system want to hold higher levels of settlement balances. We're through the balance sheet normalization period. So we think we're probably going to settle in around here. It could move up or down a little bit, but we're pretty well where we think we need to be.
Okay. So basically about 150 billion will be...
I don't... our actual settlement balance number most recently...
Settlement balances is 74 billion.
Sorry, is that... when I say settlement balance, maybe I should clarify the amount that the bank holds in government bonds. Is it closer to 100?
That's a different thing altogether. Do you have that number?
Government bonds is 167 billion.
167. Okay. So is that where the bank is going to stay then at about that?
Well, that moves in relation to money, like the demand for money in the economy. So when we put money into the economy, we offset it with bonds. So that'll move around, but that's about a steady state number for now at least.
And how does that compare to pre-COVID levels?
Yeah, it's slightly higher.
Okay. Just looking over the course of the last month, I know the bank restarted the purchase of Treasury bills back in the fall. When I look at the numbers for the money supply in the last 12 months and almost every category that I could find on the bank's website from M1 to M2++, it's all increased substantially, some 6.8, some 6.7, 3.8. We're currently in a position where under this Liberal government the economy is contracting. So, we just saw results out on Friday that Canada is in a recession, that the GDP is actually contracting. With the money supply expanding and GDP subtracting, are you concerned at all about another inflationary period?
I'm a bit confused by your question because you started with the T-bills on our balance sheet. So, do you want me to address why...
I'm just observing that some of the decisions the bank has made also correlate, whether it's causation or not, with big increases in the money supply at the same time that they...
Well, I think you're conflating two things. So, we buy treasury bills on our balance sheet to balance it. So, we need to keep our assets and liabilities in balance. So we'll buy treasury bills as normal course market operations. Money supply in the economy is a different thing altogether. Money supply is created primarily by commercial banks when they lend. So money supply is going to increase or basically move in response to demand in the economy to a large degree. But when the bank purchases various forms of government debt, it can also have an impact on the money supply if those institutional banks can lend against it. Yeah, indirectly, it can affect money supply.
So I guess that's my observation. Even if we park the discussion on treasury bills, if we look at all the ways the bank calculates the money supply, it's been increasing over the last 12 months, whereas the economy itself is contracting. And the last time that happened, we had a very significant inflation.
I'm familiar with the theory that some hold about money supply and inflation. I'm happy to dive into what we think caused inflation in the last runup. We don't think it was money supply, but if your question... I didn't again, I didn't bring money supply data with me because I thought we were here to talk about our financial statements. So we're happy to supply you with the most current numbers on money supply indicators. As you said, they're available on our website.
Thank you. That is time. Mr. Ma, you have the floor for six minutes, please.
Thank you, Mr. Chair. So to begin with, in general terms, what are the most important indicators in the public accounts that parliamentarians should monitor when assessing Canada's long-term fiscal sustainability?
In general, are you talking specifically about our...
Well, I do have several specific ones later, but I just start off with general terms.
Well, I mean, I think you would look at the health of the public accounts like you would another organization. You would look at debt levels and the cost of carrying that debt. You would want to understand what that debt is funding. Is it what type of assets or programs it's funding? Sources of revenue relative to costs, all of the kind of normal things.
Yeah, maybe I'll get into some specifics. So the first one I have is, you know, in terms of debt to GDP, in terms of interest cost, and program spending growth and contingent liabilities. Should those be things you monitor?
And how are we doing in those?
I mean, that's just a question for your committee. I'm here again, I'm here to talk about our own financial statements.
Okay. All right. So second one is how does the bank assess Canada's capacity to respond to future shocks if current geopolitical uncertainties persist for several more years? So how does the bank assess the overall economic ability? Basically, if this trend continues, you know, how well can Canadians hold up?
Yeah. Well, I'll maybe come back to the speech that Mr. Shear referenced. One of the ways that Canada could boost its ability to deal with economic shocks is to improve our productivity. Productivity can act as a buffer when you experience the kind of shocks that we have been experiencing and that we anticipate are likely to continue or at least not decrease. We're in a quite a bit more volatile world. A lot of the shocks that the Canadian economy is experiencing are coming from outside. They're international, they're geopolitical. Certainly an economy who has a healthy level of productivity has some room to buffer those types of shocks.
And so what kind of risk are most rapidly eroding that capacity?
Well, business investment is not where it needs to be. That's to be expected in an environment with a degree of uncertainty that businesses are facing right now. There are things we could do to improve our productivity that are really very much within our control. We need to continue to work on some of the barriers to moving labor and goods interprovincially. My colleague Deputy Governor Vincent gave a speech about the labor market and the need to make sure that we are training young people for the jobs that are most in demand. So there's a number of things that are very much within our control, but a lot of the shocks that the economy is facing right now are very externally driven. They're very geopolitical.
Great. So then what indicators would signal big concerns for you? Big concerns about our ability to capacity?
Well, we would very much like to see the productivity numbers turn around. If those numbers continue to decline, that would be concerning to us.
So, where are we today and what do you think is the achievable target then?
It's not good today. I mean, our productivity continues to decline. We need to continue to invest in capacity building, some of the education objectives that my colleague talked about. We need to try to convince or create an environment for business investment. I think all of the plans the government is laying out are good plans. There needs to be a sustained focus on implementing some of these plans. The tricky bit really is a lot of these things are going to take time to bear fruit. So there's sort of a lag in terms of how soon you're going to see the results of some of this investment show up in the types of things we watch. Productivity certainly it's going to take a while. Things like GDP growth, even our employment numbers, these investments take a while to get traction and really help boost the economy.
Thank you. So next question is what economic indicators should the parliament monitor to determine whether Canada's trade diversification strategy is succeeding, recognizing you said a lot of these programs will take time.
Yeah. Well, I mean, I can tell you how we're thinking about this and how we're trying to get a gauge, and that's just by talking to businesses. Often, what businesses are doing to diversify their trade doesn't really show up in their own numbers for a while and then by the time it shows up in their numbers, it takes a while to show up in national numbers. So, what we're doing to try and gather more real-time data and really understand some of the structural changes in the economy is get out and talk to businesses more.
Right. So, looking at that, do you look at the export concentration and investment flows?
Certainly, but I mean like that is from earlier. Yeah.
Yeah. So that's the data that it'll eventually show up in, but I thought your question was what can we be looking at now to understand the change now and in future.
You talked about also employment and productivity and so that's very helpful indeed. Just one last brief one. Thank you. So in the budget 2025 with the promises on major investment intended to strengthen productivity, from the bank's perspective what economic indicator should parliament monitor over the next five years.
There's probably many. I would say business investment would be a really good one. I'd keep my eye on that.
Thank you. Nice succinct answer. Thank you very much.
