Senate grills Bank of Canada chief on rates, housing crisis, capital gains
Bank of Canada Governor Tiff Macklem faced a Senate committee hearing on Wednesday, defending the central bank's approach to inflation and signalling that interest rate cuts might be further off than some Canadians might hope.
When asked by Senate Banking Committee chair Pamela Wallin why the Bank doesn't simply raise the target to 3%, closer to current inflation levels after two years of rate hikes, Macklem fired back: "Why not 4%, why not 5%? If you're going to change your target when it gets difficult, you don't have a target."
Macklem said the 2% benchmark has been a stable metric since 1995, helping guide Canada through various economic upheavals, including the recent COVID-19 pandemic and escalating 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."
The governor also addressed the outlook on interest rates, noting the central bank's cautious approach towards any potential cuts.
He reiterated the BoC needs sustained evidence that inflation will return to 2% before cutting rates from the current 5% level.
"We are getting closer,” he said. “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."
Housing crisis
Senators also questioned the role of monetary policy in creating a potential housing crisis as many mortgages come up for renewal at much higher interest rates.
Senior deputy governor Carolyn Rogers noted that while the news headlines raise alarm, data so far indicates that most Canadians are managing.
"About half the mortgages [in the category] have renewed," she said, adding that despite higher rates, default rates remain historically low. Rogers did acknowledge greater stress within the rental market, suggesting that more vulnerability lies within that sector.
“The data is not telling us so far that we have a mortgage crisis, as the headlines would tell you,” Rogers said. “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.”
Productivity emergency
Rogers warned senators the bank expects future economic shocks that could impact inflation from demographic shifts, geopolitics, consumption patterns, supply chains and commodity prices.
She said this is why she labelled Canada's lagging productivity a "break-the-glass emergency" in a March speech.
While acknowledging the role of interest rates in influencing demand, both Macklem and Rogers stressed that monetary policy cannot solve supply-side problems in productivity.
“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.
Read next: Canada's 'housing obsession' sabotaging economic productivity, says analyst
Macklem added that boosting productivity requires a concerted effort from governments and the private sector. He also suggested that governments could improve their own productivity through investments in technology and skills training.
The session also touched on the federal government’s recent budget proposal to increase the capital gains inclusion rate for corporations and individuals, a policy change that has sparked debate among venture capital and private equity sectors.
Macklem and Rogers declined to comment on this fiscal measure, reiterating their focus on monetary policy rather than specific fiscal policies.
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