FINA Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Tuesday, April 29, 2003

¹

1530

The Chair (Mrs. Sue Barnes (London West, Lib.))

Mr. David Dodge (Governor, Bank of Canada)

¹

1535

¹

1540

The Chair (Mrs. Sue Barnes (London West, Lib.))

Mr. Charlie Penson (Peace River, Canadian Alliance)

Mr. David Dodge

¹

1545

Mr. Charlie Penson

Mr. David Dodge

Mr. Charlie Penson

Mr. David Dodge

Mr. Paul Jenkins (Senior Deputy Governor, Bank of Canada)

Mr. Charlie Penson

¹

1550

Mr. David Dodge

Mr. Charles Freedman (Deputy Governor, Bank of Canada)

Mr. Charlie Penson

Mr. Charles Freedman

Mr. Charlie Penson

Mr. Charles Freedman

The Chair

Mr. Pierre Paquette (Joliette, BQ)

¹

1555

Mr. David Dodge

Mr. Charles Freedman

º

1600

Mr. Pierre Paquette

M. Charles Freedman

M. Pierre Paquette

Mr. Charles Freedman

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

Mr. David Dodge

º

1605

Mr. Roy Cullen

Mr. David Dodge

º

1610

Mr. Paul Jenkins

The Chair

Mr. Bryon Wilfert (Oak Ridges, Lib.)

Mr. David Dodge

º

1615

Mr. Bryon Wilfert

Mr. David Dodge

Mr. Bryon Wilfert

º

1620

Mr. David Dodge

The Chair

Mr. Paul Jenkins

The Chair

Mr. Charles Freedman

The Chair

Ms. Judy Wasylycia-Leis (Winnipeg North Centre, NDP)

Mr. David Dodge

Ms. Judy Wasylycia-Leis

º

1625

Mr. David Dodge

º

1630

Mr. Charles Freedman

Ms. Judy Wasylycia-Leis

The Chair

Mr. David Dodge

º

1635

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

Mr. David Dodge

Mr. Charles Freedman

º

1640

Mr. Shawn Murphy

Mr. Charles Freedman

The Chair

Mr. Gary Pillitteri (Niagara Falls, Lib.)

º

1645

Mr. David Dodge

Mr. Paul Jenkins

Mr. David Dodge

Mr. Paul Jenkins

º

1650

Mr. Gary Pillitteri

Mr. David Dodge

The Chair

Mr. Charlie Penson

Mr. David Dodge

º

1655

Mr. Charlie Penson

Mr. David Dodge

Mr. Charlie Penson

Mr. David Dodge

Mr. Charlie Penson

Mr. David Dodge

Mr. Charlie Penson

Mr. David Dodge

The Chair

Mr. Tony Valeri (Stoney Creek, Lib.)

»

1700

Mr. David Dodge

Mr. Tony Valeri

Mr. David Dodge

Mr. Tony Valeri

Mr. David Dodge

»

1705

The Chair

Ms. Sophia Leung (Vancouver Kingsway, Lib.)

Mr. David Dodge

Ms. Sophia Leung

Mr. David Dodge

»

1710

The Chair

Ms. Judy Wasylycia-Leis

Mr. David Dodge

The Chair

Mr. Paul Jenkins

»

1715

The Chair

Ms. Judy Wasylycia-Leis

Mr. David Dodge

The Chair

Hon. Jim Peterson (Willowdale, Lib.)

Mr. David Dodge

Mr. Jim Peterson

Mr. Charles Freedman

Mr. Jim Peterson

Mr. Paul Jenkins

»

1720

Mr. Jim Peterson

Mr. Paul Jenkins

Mr. Charles Freedman

Mr. Jim Peterson

Mr. Paul Jenkins

Mr. Jim Peterson

The Chair

Mr. Pierre Paquette

»

1725

Mr. Charles Freedman

Mr. Pierre Paquette

Mr. David Dodge

»

1730

The Chair

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CANADA

Standing Committee on Finance

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NUMBER 052

l

2nd SESSION

l

37th PARLIAMENT

---

EVIDENCE

Tuesday, April 29, 2003

[Recorded by Electronic Apparatus]

¹  (1530)  

[English]

    The Chair (Mrs. Sue Barnes (London West, Lib.)): Bienvenue à tous.

    The order of the day is, pursuant to Standing Order 108(2), consideration of the Bank of Canada's “Monetary Policy Report”.

    We are very pleased to have with us from the Bank of Canada the governor, David Dodge. Welcome, sir. Assisting you today is Paul Jenkins, senior deputy governor--welcome also--and Charles Freedman, deputy governor. All three of you, we're always pleased when you come before our committee.

    When you're ready, Mr. Dodge, please go ahead.

    Mr. David Dodge (Governor, Bank of Canada): Thank you very much, Madam Chair, and good afternoon to you and all the members of the committee. I'd like to say how much we appreciate the chance to come here twice a year to talk to you following the release of this report.

    We are very aware of the need to keep members informed and indeed, through you, all Canadians informed about what we're doing and why. We look on this as a great opportunity and we're extraordinarily pleased to be here.

[Translation]

    I'm going to spend a few minutes summarizing for you our most recent "Monetary Policy Report". But, before I do that, I'd like to say a few words about my colleagues here with me today.

[English]

    I'm really delighted to introduce to you our newly appointed senior deputy governor, Paul Jenkins. Most of you know Paul. He's been at the bank since 1972 and for the last 11 years has served as deputy governor. In that role he's been responsible for the bank's analysis of international economic and financial issues and for our liaison with related international bodies such as the IMF. He's also been in charge of the strategic direction and oversight of the bank's communications. Paul has a deep understanding not only of economic and monetary policy issues but also of the bank and its staff, and I know he'll provide energetic leadership in helping the bank to continue its tradition of excellence.

[Translation]

    Also with me today is Deputy Governor Charles Freedman. Chuck will retire in September, after almost 30 years at the Bank. He's been a Deputy Governor since 1988, and his leadership in the areas of monetary policy, financial institutions, and Canada's clearing and settlement systems has been invaluable. One of Chuck's most important contributions has been his tireless promotion of bilingualism at the Bank. I can't begin to say how much we will all miss him--especially those of us on the Bank's Governing Council--not only for his expertise, but also for his enthusiasm and keen wit and intellect.

    Also, I'm delighted to tell you that the Bank of Canada today announced the appointment of David Longworth and Mark Carney as Deputy Governors. Mr. Longworth and Mr. Carney are exceptionally qualified in economy and finance. It's always hard to replace Chuck; we need two people to replace him.

    Last week, we released our spring 2003 "Monetary Policy Report", in which we discuss economic and financial trends in the context of Canada's inflation-control strategy. I last testified before this committee in October, following the release of our autumn "Monetary Policy Report".

    To place our recent experience in some context, let me go back a bit further than that. Following the 11 September 2001 terrorist attacks in the United States, the Bank of Canada quickly and aggressively cut its policy interest rate to shore up confidence and support domestic demand. By the spring of 2002, evidence had already started to build that demand was growing faster than the economy's production capacity.

¹  (1535)  

[English]

    As you know, monetary actions must always be forward-looking, so even though demand pressures were not yet then showing up in prices, we raised our key policy rate three times between April and July by a total of three-quarters of a percentage point.

    Now, Madam Chair, when we met last time last fall, inflation was on the rise, but we refrained from raising interest rates then for three reasons: first, the prevailing geopolitical and financial uncertainties; second, the high yield spreads and restricted access to funding for riskier corporate borrowers; and finally, the expectation that global economic weakness would restrain total demand for Canadian goods.

    Since then, inflation has been above our 2% target. The total year-over-year CPI inflation rate peaked at 4.6% in February before falling back a little to 4.3% in March. The key factors behind the jump in total inflation are, as you well know, the sharp rise in oil and natural gas prices, increases in insurance premiums, and strong domestic demand, which has led to price pressures in other sectors such as shelter and some services.

    In this environment, some indicators of short-term inflation expectations have edged up. These include data from the survey taken by the bank's regional offices and the average private sector consensus forecast. Longer-term expectations of inflation, however, do remain well grounded at about 2%.

    Now, as you know, to assess the future trend of inflation, the bank uses a measure of core inflation that strips out the eight most volatile items in the CPI and takes out the changes of effects in indirect taxes on other items. In this measure, core inflation does now sit at around 3%. It should fall to 2.5% in the second half of this year and to about 2% by early next year.

    Total CPI inflation will continue to be importantly affected by swings in crude oil prices. If oil prices were to settle at about $25 U.S. a barrel by mid-2003 as futures prices indicate and if the Canadian dollar were to stay at about where it is, total CPI inflation would likely fall temporarily below core rate in the first half of 2004 before steadying out at close to the core rate later in the year.

[Translation]

    In view of the domestic inflation situation and the underlying momentum of domestic demand, we have raised our target overnight rate by 25 basis points on each of our last two policy announcement dates--in March and in mid-April--bringing it to 3.25%.

    As I said before, economic, financial, and geopolitical uncertainty figured prominently in the global picture last October. Some of the geopolitical and financial uncertainty has lifted in recent months, and the Bank expects that it will continue to recede. However, weak domestic demand in some regions of the world is still a concern. So, over the near term, a degree of global economic uncertainty remains.

¹  (1540)  

[English]

    But even with this, the risks confronting the world economy now appear to be better balanced than they were last autumn. By the end of this year we expect that business and household confidence levels should improve.

    In Canada domestic demand has remained quite strong. There is uncertainty in the short term, however, about the possible impact of SARS, particularly in the Greater Toronto Area. As I said last week, we expect that economic growth in the second quarter will be somewhat weaker than we had projected in our “Monetary Policy Report” because of the impact of SARS, but it really is too soon to make an assessment of the magnitude of its effect on economic activity.

    We expect that the Canadian economy will strengthen towards the end of 2003, partly thanks to a pickup in economic activity in the U.S., and average annual growth rate in Canada is expected to be about 2.5% this year. Now, during 2004 our economy should strengthen further, expanding at a rate above its 3% growth potential, and this means that most of the small amount of economic slack that is likely to open up in Canada during 2003 will have closed by the end of next year.

    For this reason, the bank continues to believe that further reductions in monetary stimulants will be necessary over time to return inflation to its 2% target and sustain output levels close to capacity. The timing and the pace of further increases in policy interest rates will depend on the strength of domestic demand, the evolution of inflation expectations, and the pace of expansion abroad, within the United States and overseas.

    Paul, Chuck, and I would now be glad to answer your questions, Madam Chair.

    The Chair (Mrs. Sue Barnes (London West, Lib.)): Thank you very much.

    We will go for eight minutes. Mr. Penson.

    Mr. Charlie Penson (Peace River, Canadian Alliance): Thank you, Madam Chair.

    I would like to welcome Mr. Dodge and his officials to the committee today. It's always a pleasure to have you here to bring us an update on the Canadian economy as well as the other more geopolitical aspects you continually monitor.

    I do want to ask a couple of questions. When the Canadian dollars starts to rise, you would normally think that's a good thing, but there are some people who are concerned about that, especially when it rises to a certain level.

    My first question would be, what is the amount the Canadian dollar can rise before it really starts to hurt Canadian businesses, that is, unless we have some corresponding fundamental adjustments in taxes and so on to give them some return on the other side? Where is that break-even level when it starts to really hurt? I know it's different for different industries, but do you have any general rule of thumb you use where that would have to top out before it starts to really hurt the Canadian economy?

    Mr. David Dodge: No, we don't have any rule of thumb at a particular point, any particular value of the Canadian dollar vis-à-vis the United States dollar.

    What I think is important to remember at this time is that we are seeing an adjustment in the value of the U.S. dollar, the value at which it trades, against most of the world's currencies. We discussed this here--I was looking at the record back in the fall of 2001 because a similar question came up at that point--and what we indicated at that time was that we expected there would be some adjustment of the U.S. dollar. It had been riding really rather high vis-à-vis most of the world currencies, and we expected that as the U.S. current account adjusted to come into better balance, we would expect to see the U.S. dollar rise in value. One never knew the timing or just how fast that would happen. What we have seen is a rather quick but very orderly re-evaluation of the U.S. dollar.

    So now we are sitting at about the same level we were sitting at three years ago vis-à-vis the U.S. dollar.

¹  (1545)  

    Mr. Charlie Penson: How much of the makeup of the Canadian dollar's increase do you attribute to the depreciation of the U.S. currency as a result of the current account deficit, and how much would you put down to the interest rate spread we have between Canada and the United States?

    Mr. David Dodge: First of all, if you look at the movement of the U.S. dollar vis-à-vis the other major currencies, the euro and then currencies like the Australian dollar, what you see is a similar pattern. We did not depreciate as much against the U.S. dollar or it did not appreciate as much against ours as was the case in Europe, so the amount of change to come back has also not been as dramatic.

    But as you well know, in our analytic framework, looking at factors that are very important for the bilateral exchange rate with the U.S. dollar, we do have two or three things that clearly stand out. One is non-energy commodity prices, one is interest rate differentials, and the other is relative economic performance.

    Clearly, the fact that U.S. rates at the very short end are very low at the moment has some impact, but it's not possible to give you a clear answer as to the relative importance of that vis-à-vis all the other things that are going on.

    Mr. Charlie Penson: Would you take that into account, the differential between the two interest rates? How big a factor is that when you're setting rates in Canada? Is there a point there where the interest rate spread is so great it becomes a problem for us?

    Mr. David Dodge: I'm going to turn this over to Paul after. He needs to exercise his voice for the first time as senior deputy governor.

    Some hon. members: Oh, oh!

    Mr. David Dodge: I think what's important is that we keep focused on trying to keep the balance between supply and demand in our economy so we keep inflation at roughly 2%. We take a lot of factors into account as we do that. Obviously, the exchange rate is one of the factors that over the medium term will influence that, but there are a lot of other factors as well.

    So let me turn it over to Paul so he can exercise his lungs for the first time here.

    Mr. Paul Jenkins (Senior Deputy Governor, Bank of Canada): Well, I think the governor has provided a good lead-in, and it really is to think about the exchange rate as part of our overall monetary policy framework, which is anchored to a target of 2% inflation. As the governor mentioned, we do take into consideration a considerable number of factors, such as different sources of growth in the economy and domestic versus external, but it is very much focused on the need to preserve a low, stable, and predictable rate of inflation as our contribution to good overall economic performance.

    So we do not target interest rate differentials. We set the overall stance of monetary policy appropriate to achieving our inflation target and through that to contributing to good overall economic performance.

    Mr. Charlie Penson: I just have one further question. I guess everybody's watching the U.S. economy to see where it's going, but it seems to me that a lot of it was driven by automotive sales and new housing starts, just as the Canadian economy was in the last while. Governor, you talked about the probability of the U.S. economy starting to recover, but isn't there also some danger of a lag time between the two economies? It seems to me that there have been times when the U.S. economy has gone into a bit of a dip before we have and then come out before we have. Are you anticipating any lag time between the two economies?

¹  (1550)  

    Mr. David Dodge: Let me start the answer on lags a little differently, and then I'd like to ask Chuck to get in because he's just back from New York.

    The big issue in the United States has been and remains, when is it that business investment will recover? The consumer has been remarkably resilient in the United States, in part because of funds provided through refinancing mortgages, but the consumer has been remarkably resilient. Business, particularly large business, has in fact been very reluctant to make new investments, so the investment side has been weak.

    As we discussed last fall, it's a little bit of a horse race to see when that business investment will start. I think the best judgment now is that with the dissipating economic uncertainties and with the Americans coming to grips with their corporate governance and accounting issues, sometime in the fall we'll begin to see it start, and once it starts, it will probably come on really very quickly. That generally has been the experience in the past.

    But Chuck, you were just down talking to people in New York.

    Mr. Charles Freedman (Deputy Governor, Bank of Canada): I'll just make two points on that. One is that I was presenting our “Monetary Policy Report” to a number of business and financial groups, in particular focusing to some extent on our forecast and expectations of what might happen in the world economy and the Canadian economy. One of the things I was looking for was a response to our own judgment that the U.S. economy is going to bounce back towards the end of this year and will grow at about 4% in 2004, and that seems to be the consensus. There are people who think it's going to be a little less than that, but no one responded by saying no, we think this is way out of line. It seems to be, in New York at least, that this is consistent with the views they have.

    One of the members of the Board of Governors of the Federal Reserve System, Ben Bernanke, gave a speech April 24, just five days ago, called “Will Business Investment Bounce Back?” His conclusion was, in short, a sectoral approach suggests that an investment bounce-back of moderate proportions is a reasonable expectation.

    Now, forecasting the future is a very difficult game; things could come out better, they could come out worse, and we very much recognize that.

    Mr. Charlie Penson: That's why you have all those economists in that department.

    Mr. Charles Freedman: The only thing we can be sure of is that the exact forecast we have will not be right, but it will be somewhere in there, probably.

    Mr. Charlie Penson: But economists always have a good excuse after the fact for why it didn't happen.

    Mr. Charles Freedman: Exactly.

    This seems to be kind of a mainstream view, that there is a likelihood of a bounce-back in investment, and one of the things Bernanke focuses on is what Keynes called “animal spirits”. If people start getting a little depressed and negative about the future in the way we've seen in the last little while, that feeds upon itself. But the reverse also happens. As people's expectations pick up, as their optimism increases, they start spending, and that in turn feeds into a bit of a spiral as well.

    So if we do get the expectations improving, if people's confidence comes up, I think this is a reasonable--

    The Chair: I think we're going to leave that for the second round.

    At this point we'll go to Monsieur Paquette pour huit minutes.

[Translation]

    Mr. Pierre Paquette (Joliette, BQ): Thank you, Madam Chair.

    Thank you very much, Mr. Dodge, for your presentation, although your conclusion worries me greatly when you say that you think that with the elements you have, it's highly likely that the policy of monetary stimulus reduction will continue in the future.

    I was among those who, within the unions--because I was working with organized labour--suffered the extremely negative effects of the Bank of Canada's policy in the early 1990s, when, to start with, there was a very deep recession in the US and a relatively slight one in Canada, but with a policy of raising interest rates, which extended it beyond the limits it would surely have had if we had had a less dogmatic policy at the time.

    I realize that we're dealing with another administration at the Bank of Canada, but I'm always afraid of the untoward effects of a too restrictive monetary policy.

    In your presentation, what surprised me--and Mr. Jenkins mentioned this too--is that you no longer talk about the range of 1% to 3%, for the target inflation rate, whereas it was agreed, I thought, that this would be the range until the end of 2006, if my memory serves me well. But you have constantly talked about 2%.

    So, if I have a range of 1% to 3%, if the inflation rate is 3% and if I'm able to say to myself that the prospects of economic growth are still good, I'd be happy with an inflation rate of 3%. If, in order to reach 2%, I had to increase interest rates so much that I stifled economic activity for a good while, I think this would be a harmful policy.

    In what you presented to us, I share a great many of the elements of your analysis. For example, when you say that we're approaching the limits of our production capacity, yes, but if we raise the interest rates, that will reduce investments. By doing so, we're going to limit the capacity and possibility of increasing production capacities.

    Secondly, you identified at least two very important elements regarding the explanation of the current increase in the inflation rate: the cost of oil--and I think that with the geopolitical situation, we can expect the price to get close to $25 or $24 a barrel--and shelter.

    But with regard to shelter, there's a speculative effect. It's that a large part of the funds that were in stock shares have left that sector in order to be invested in real estate. So there's a rise in the cost of shelter that is due in fact to a shift in assets, which may be speculative. But if we also increase the interest rates and reduce the possibility of increasing the shelter stock, the prices will rise. So you'll be stuck increasing the interest rates to fight inflation, which at that point will be caused by the increase.

    So I hope that you have taken all those elements into account. But to be more precise, I'd like to know why you haven't talked about the 1% to 3% range for the Bank of Canada's objectives in the coming months?

¹  (1555)  

    Mr. David Dodge: I'll begin. It's really a range, and we want to stay within the two extremes of the range. That's why we always say that for an 18- to 24-month period, we aim for 2%. If we're above 2%, that means that we can expect a slightly more restrictive policy. On the other hand, if we have 1%, or less than 2%, it's just the opposite.

    So we have a pretty simple, but symmetrical policy, and that's extremely important. It's not a ceiling. We have a symmetrical policy to reach 2% over 18 to 24 months.

    Therefore, at this point, we have a policy that is not very accommodating, not as accommodating as it was 12 months ago, but certainly not restrictive. It's a policy that encourages growth again, but we're not encouraging it to the same extent as 12 months ago.

    I do think, as you yourself said, that in the future, we'll have to raise the interest rate a little, because at that time, there will be enough stimulus in the economy.

    It's important for all Canadians to know that we are following a policy that is first of all symmetrical, but a policy in which they can trust that in the future the inflation rate will be about 2%.

    Chuck, do you want to add something?

    Mr. Charles Freedman: Something that was very important in what we said in the 1990s was that having a low and predictable inflation rate will bring about an economy much better than the one we saw in the two previous decades. Of course, the interest rates at the beginning of the 1990s, as you said, were very, very high, and they were even higher at the beginning of the 1980s. But that was the result really of an inflation rate that was very high, and it was that inflation and the distortion that resulted from that inflation that caused the problems, the fairly sharp recessions that we saw ten or twenty years ago.

    What we have seen in the last decade is a situation that is much more stable. There was an article in our review a few months ago that showed that in Canada--and it's the same thing around the world--the economy became much more stable when the inflation rate was lower and more predictable. That's very important. That's the reason why our aim is to have a low and predictable inflation rate.

º  (1600)  

    Mr. Pierre Paquette: What's important, as you've just said, is for the inflation rate to be predictable.

    M. Charles Freedman: Yes.

    M. Pierre Paquette: But in 1990, the Canadian inflation rate was lower than the American inflation rate, and the Bank of Canada pursued its restrictive policy, to such an extent that the expectations were that interest rates would go up. You lowered the short-term interest rates; the market couldn't even keep up.

    So a restrictive policy announced like that can have some perverse effects. I simply hope that the current Bank of Canada management will pay attention to how the actual economy evolves and not base itself on too fundamentalist a religion, I'd say--we're against fundamentalists at present--a very monetarist one, like the one we experience in the 1990s.

    Mr. Charles Freedman: But one of the great assets of the system we follow now is that the inflation rate itself is the result of the balance between the supply and demand of the economy, and if we can avoid both excess demand and excess supply, that can avoid the problem we've had in the past. Really, by following a framework, as we have done for the past ten years, with the same approach, we can avoid the big fluctuations in demand and the economy. In my opinion, this was a great success in the world. We've had a lot of shocks recently, but the economy went on running all right.

[English]

    The Chair: Thank you for such a good one.

    Now, let's go to Mr. Cullen for eight minutes.

    Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chair. Thank you, Governor Dodge, Mr. Jenkins, and Mr. Freedman.

    Mr. Freedman, enjoy your retirement. We may not see you again. Thank you for your contribution.

    I'd like to come back to inflation. Governor, you talked about some of the pressures--the rise in oil prices, natural gas prices, and insurance premiums, also strong domestic demand--and that's created some pressure on shelter and some services.

    I'm wondering, are you seeing any pressure in relation to negotiated labour settlements? Second, we have always had this concern--at least I have--about importing inflation. Of course, the Canadian dollar is strengthening now, so that may not be as much of a concern, but there is a concern that one day we'll start to import some inflation. Are we seeing any signs of either of those two factors?

    Mr. David Dodge: Let me start with the labour market. We have witnessed over the past 12 months a tremendous increase in the participation rate of Canadians in the labour force. We are now at an all-time high in terms of the employment rate in the country, and that is just extraordinarily encouraging, not just from an economic point of view but clearly from a social point of view as well. At the same time, wages and salaries have been remarkably well behaved, moving along at between 2% and 3%.

    So the short answer to your question is, with perhaps a couple of small exceptions, we don't see the pressures coming from the labour cost side. Obviously, some of the construction trades are in very tight supply, but by and large we don't see those pressures.

    What we have seen is simply relatively strong consumer demand, providing an environment in which retailers and vendors can in fact just increase their margins a little bit, and what we've seen is that the profit share of the economy has turned back up rather more quickly in Canada than it has, for example, in the United States. That's a good thing because what's happened is, we have had a little bit better performance on investment here in Canada than they've had in the United States.

    But on the other hand, some particular markets clearly have been tight. Mr. Paquette mentioned the housing market. Well, we've had new house prices rising at a little over 5% for a few months now, so there is clearly a bit of pressure in that market. We have had some service prices running well over 3%, so there are some pressures in those markets. Of course, we have been worried that if oil and gas prices remain very high, then those costs will start to get built in.

    Now, we have seen that reverse, and that is a good sign, which is why we say we think we're on track at the moment to be back at about 2% for core early next year. We do expect that because of the way we measure these things year over year, in the first quarter of next year with oil and gas prices at, say, roughly $25 a barrel or the equivalent, the total inflation will because of the influence of that sector in fact dip below core for a period of time.

º  (1605)  

    Mr. Roy Cullen: Thank you.

    With respect to the Canadian and U.S. dollars, the Canadian dollar is strengthening, of course. There is the situation in Quebec, with a new government. If there was any reality to the idea that this was impacting the Canadian dollar because of the investment climate and concerns in terms of that particular situation, that might improve the Canadian dollar further.

    I'm just wondering, we have already heard from same sectors such as the softwood lumber industry that they are suffering under a number of different dilemmas. One of them is the strengthening Canadian dollar on top of all that. Of course, there has always been this debate around the Canada-U.S. exchange rate sort of masking productivity gains or allowing industry to become complacent. I don't think many industries consciously go complacent, but it can happen, I suppose.

    Are there any indications you have that our industrial sectors have been lagging in terms of innovation or productivity and that this could start to show up if the Canadian dollar starts to strengthen? Are there any public policies that would address that?

    Mr. David Dodge: Paul will deal with the details on that, but I think what is important to note is that we went through a long period in the 1990s where we were adjusting our fiscal policy both federally and provincially to get our financial houses in order, where we were making the final adjustments to the free trade arrangement of the late eighties. That was a difficult period, and during that period we actually had a lot of slack in the labour market.

    Now, what is very important is that price mechanisms work. In fact, real wages in Canada were very much contained relative to the United States, so it's not really very surprising--indeed, it's exactly how markets are supposed to work--that we were using a bit more labour in Canada relative to capital than the Americans over that period. The price system was saying that it should be the case.

    We have now begun to take up that excess supply of labour, which is an extraordinarily good thing. There will be very real pressures on industry to invest and to try to improve productivity. That's the sensible thing for them to do. If you ask me if I'm an optimist or a pessimist about Canadian productivity as we look through this decade, I'd have to say that for that reason I'm a relative optimist.

    Second, our own analysis would say that there's a long, long tail on technical innovation. It comes through relatively slowly as we all adapt and learn how to use it. I'm relatively optimistic about productivity and real income growth in Canada over the decade.

    Paul, you're the one who sits on top of these models day in and day out.

º  (1610)  

    Mr. Paul Jenkins: I think the framework we have established in Canada on the economic policy side is really beginning to pay dividends. I think that's one of the reasons the Canadian economy has actually performed as well as it has over the last three or four years when you compare it to any of the other G-7 countries.

    I think it is very much a reflection of what the governor has just said, that we have now established a low, predictable inflation environment in Canada, there's the fiscal framework we put in place, there's the adjustment to free trade, and there are structural adjustments. Indeed, when you begin to look at individual indicators such as investment as a percentage of GDP, what you see through the second half of the 1990s and continuing into this decade is a significant increase in the proportion of investment, particularly in machinery and equipment, as a percentage of GDP, an increase up to levels close to what had been the case in the United States through much of the 1990s.

    Looking forward, I think there is very good reason to expect that we will continue to invest in new technology and in human capital and that the productivity gains in this country going forward will be significantly better than what we experienced through much of the 1970s and 1980s.

    When you add on top of that our current account surplus, we're accumulating wealth and we're using those domestic savings for investment in capital, both human and physical. I think these trends are very indicative of what we see going forward and bode very well for the Canadian economy.

    The Chair: Thank you very much.

    We'll now go Mr. Wilfert for eight minutes.

    Mr. Bryon Wilfert (Oak Ridges, Lib.): Thank you very much, Governor and gentlemen. It's always a pleasure to have you here.

    There are a couple of areas I wanted to talk about. I know, Governor, you had mentioned this last week, that we're still feeling the effects to some degree of 9/11, of the Iraq war in some sectors of the economy, and obviously now of the SARS outbreak. That has had an impact not just on the Greater Toronto Area but across the country. I'm obviously delighted to hear the WHO has rescinded its travel advisory, but the fact is that the damage was done last week, and I doubt that the fact it's now been rescinded will necessarily be on the front page of every newspaper.

    There is a psychological impact. We had companies recovering from 9/11 and we had people who were concerned about Iraq, about our trade relations--some concerns were, I think, unfounded, but they were certainly there--and then about the implications of SARS. Now, in light of what you have seen recently--and I know it's difficult for you to give us any specific figures--what would be your advice in terms of how we can deal with a situation where people perceive that they have lost money or financial capacity because of something that was unforeseen?

    It is not similar, I would suggest, to cases such as the ice storm or the Red River situation in 1997, where very specific provisions are allowed in the legislation to deal with compensation. In this case, how would you comment on or respond to the idea that the government should somehow do a major financial bailout, and what implications would you see in that?

    Mr. David Dodge: I'm going to have to leave it to the government to respond to that particular question. I think you did use a very important word, though, and that was “perceive”. What clearly is happening in respect of the perception about SARS in Toronto is that, gee, we'd better stop or slow down our visits, we'd better not spend as much time in the subway or in restaurants, and so on, and that perception really hurts. There's a real hurt from that.

    Some of that will in fact simply be delayed, and as the perception goes away, there's usually some relief and people come back out and so on. We don't know, and certainly we at the bank don't pretend to know this will happen. But if we look at other instances, that certainly does happen.

    There's no question that over the period of April and into May there are going to be some very real losses, some of which will not be made up in the future. We don't know what the overall impact is likely to be, and in fact one can't know.

    Clearly, in terms of the second quarter and not just in Toronto, it's going to be somewhat negative. We all hope that by the end of the second quarter it'll be over, and in fact it is certainly conceivable that by the time we get to the third quarter, what we'll see is some of the delay in consumption come back.

    Nevertheless, we fully expect that in terms of employment, there will be an impact in April and May and maybe on into June, and we will see that in the employment numbers.

º  (1615)  

    Mr. Bryon Wilfert: In terms of your forecast with regard to both inflation and employment, you really would be saying that hopefully we're looking at more of a very short-term impact and that we might see an upswing towards the end of the year, maybe based on delayed consumer response, etc.

    Mr. David Dodge: Let's be careful. We think this is so according to the way we set it out here, which doesn't take SARS into account. We are expecting that by the time we get to the fourth quarter, we're going to have stronger underlying growth. What I think may happen, although we certainly don't know, is that some of the negative impact, which will show up in the second-quarter figures, will be reversed when we get to third-quarter figures.

    Within the size of the economy as a whole, these are relatively small numbers, and all we can hope is that our professionals in the health community are successful in their efforts to contain the disease and that indeed they themselves do not wear out under the enormous strain under which they are operating.

    Mr. Bryon Wilfert: Governor, I'd like to switch gears slightly. I recently returned from Japan. I've been talking to finance officials and to economic commentators, and the issue in Japan is of course deflation. It's the issue of an increasing GDP ratio of 150%. It's also the fact that all of the debt is domestically owned or controlled and the fact that there's no sense of urgency in Japan. There's no sense of crisis in Japan, yet it is the second largest economy in the world, greater than all of the rest of Asia, as an example. We tend to focus a lot on China, but obviously Japan is very important, particularly with the structural implications and of course the nature of the banking system there.

    I know that there was some discussion in the United States with regard to looking at the situation in Japan, and the Federal Reserve did do an analysis on that. I'm wondering whether or not the bank has had a chance to review it. What are your thoughts on it? What do you think the chances are, notwithstanding some of the things you've already talked about, that we may see something like that occur in the United States, and if so, what are the implications here?

    After two years of Koizumi, the Japanese still have not been able to make the kinds of structural changes that seem to be necessary. It's almost going back to an Alice in Wonderland situation, where they really are in a state of denial that there is a problem, but at some point you may see the cards fall.

º  (1620)  

    Mr. David Dodge: I'm going to ask Paul, who follows this very closely, to start off, and then I'll ask Chuck to comment on the financial stability aspects of it.

    The Chair: Mr. Jenkins.

    Mr. Paul Jenkins: You've touched on a number of very important issues, first of all the risk of deflation in North America, in the United States, suggesting we may see some of those effects in play here as well.

    Certainly, as we look at the global situation, including of course North America, we don't see risks of deflation. In fact, when you look at the current performance of inflation amongst most of the major industrialized countries, what you do see is some downward pressure on goods prices, but in many instances this is related to productivity gains, which is what you would expect. When you look at service prices, they are certainly moving up, and on average most industrialized countries, in our view, are not in any risk of a deflation environment. That would be point one.

    Point two, and Chuck may wish to comment on this as well, is the issue of the Japanese experience and central banks wanting to learn from that. Indeed, the Federal Reserve, as you suggested, looked quite closely at the Japanese experience. One of the conclusions they came to is, if you do see these sorts of tendencies developing....

    And indeed, I think some of this comes back to the importance of having a very clear policy objective on the monetary policy front. It goes back to the governor's earlier comment about the importance of being symmetric in your approach, so if you see pressures developing that indicate there are downward pressures on inflation, you want to respond to those and respond to those in a timely fashion. In the Federal Reserve study their conclusion was that if you do act on a timely basis, then central banks certainly have the wherewithal to respond to those types of pressures.

    Now, on the Japanese situation itself, I think you're absolutely right. There remain a number of important structural issues for that country to deal with, particularly the banking sector, and there is a government agency in place to try to move that forward. As well, there is restructuring on the non-financial corporate side.

    Yes, debt levels are very high in Japan, and that poses a medium-term issue, but I think we're all well aware of it and we do think it will take some time for them to work their way out of that.

    The Chair: Mr. Freedman, could you give a brief answer.

    Mr. Charles Freedman: This is just to pick up on a couple of things Paul has mentioned.

    When people ask me how you get out of the Japanese situation, I say, you don't get into it in the first place. The reason this is important is the point Paul made. If you see that kind of thing developing, you act quickly, and that is the gist of the speeches both Chairman Greenspan and Mr. Bernanke made.

    I think we have a certain advantage in Canada. Some of the other countries have inflation targets, but those targets in and of themselves anchor inflation expectations. We found in Canada even in the mid-nineties, when we had a relatively weak economy and there was downward pressure on inflation, the fact that we had the targets helped avoid further downward pressure. We got down as low as 1% or even a little bit lower, but it avoided or helped avoid our going down further.

    The other thing that really does differentiate the Japanese system from the American system, and you've mentioned it, is the weakness of the financial institutions. The Bank of Japan increased its own balance sheet by some 30%, the broader concept of money went up 3%, and loans fell 3% last year. That in a sense is a reflection of the fact that those banks are having a lot of difficulty.

    If you compare them, say, with the U.S. banks or certainly Canada's banks, we have a much healthier financial system, so those kinds of circumstances would not aggravate or exacerbate a macrosituation.

    The Chair: Thank you to you both.

    Ms. Wasylycia-Leis.

    Ms. Judy Wasylycia-Leis (Winnipeg North Centre, NDP): Thank you, Madam Chairperson.

    I'd also like to thank Mr. Dodge, Mr. Freedman, and Mr. Jenkins for your appearance today. It's very informative for me. I am new as a finance critic, so this is very helpful.

    Mr. David Dodge: Thank you, Ms. Wasylycia-Leis.

    Ms. Judy Wasylycia-Leis: It's nice to see Mr. Dodge after his stint as deputy minister of health. I appreciated our exchanges then and I look forward to today's discussion.

    I want to pick up on the discussion earlier about what would appear to be the preoccupation on the part of the Bank of Canada with inflation and with interest rates as the only tool we have in our basket to deal with the economic situation in Canada. I don't know if that is a fair assessment. It would seem, based on your report and the discussion to date, that in fact there is that emphasis on inflation and on interest rates as the only tool to address inflationary pressures.

    I would acknowledge that there are inflationary pressures; I accept what you said in your report. But it would seem to me, as Mr. Cullen already asked you, that you have identified that there are specific factors causing these inflationary pressures. You have in fact referred to one-off factors, higher costs for key inputs, robust domestic demand, and so on.

    So if there are very specific factors causing inflation and it's not an across-the-board phenomenon or problem, why do you use a system-wide approach in terms of interest rates to deal with those inflationary pressures? Now, there are issues about oil and gas prices and a monopoly in that area, and there's the question about a lack of regulations or deregulation in terms of insurance premiums in Ontario, factors that contribute to inflation. Wouldn't it be better for us to tackle those problems through other regulatory mechanisms, other processes available to this committee, as opposed to doing something I think is potentially problematic for the economy, that is, to increase the interest rate?

º  (1625)  

    Mr. David Dodge: Let me go back to the issue. You say to us, you guys are focused only on inflation. Actually, what we are really focused on is trying to keep the economy growing at its potential. That is the objective we have. The reason we focus on inflation is first, it's the tool we actually have to operate on, but perhaps more importantly, it is actually a gauge of how close to or how far away from capacity we are. What we'd like to do is to stay humming along at 3% growth with no excess demand and no excess supply.

    Indeed, the experience we've had with inflation targeting is that we've done a lot better under that regime than we did under previous regimes and that indeed Canada has ended up doing better than a lot of other countries because of it. The inflation targeting is a tool to achieve the economic goal of rallying at about capacity, and it's extraordinarily important that we recognize that.

    We at the bank can only influence that one tool, which is how we set monetary policy. It is more than just the key interest rate that impacts; clearly, the broader aspect of credit conditions impacts. But to explain what we're doing and indeed the sort of fundamental level of what we are doing, I can say that we are trying to provide monetary stimulus when the economy is a little below or likely to be below capacity and to provide a little bit of restriction when it's likely to be above capacity.

    We were very worried in the fall of 2001 that with the events in the United States and the fallout from that, we could go way below capacity, so we dramatically cut interest rates. What we've been doing in the intervening period is really taking up some of that stimulus. The policy is still stimulative, it's just not as stimulative as it was then.

    There's a final point I would like to make and then maybe Chuck would like to say a word. You are absolutely right that the structure of markets in our economy clearly has an influence. To the extent markets work smoothly and quickly, then even small increases or decreases in prices in fact make their adjustment and we don't get big problems.

    At the moment, one of the things that has been strong because of a very stimulative monetary policy is housing, and great things have happened. We've built lots of houses, which is great for Canadians, but we've now started to get to the point where we're pushing against capacity and we're seeing those house prices go up. So there are some generalized pressures out there.

    Finally, we did try--I don't know how successfully--to put a box in our report--because this is really what we are responsible for--on page 6 to explain a bit what has happened, not to explain away or to take away any responsibility from our shoulders, but to really try to explain this.

º  (1630)  

    Mr. Charles Freedman: If I could, I'll just add one point. In the late fall, when we thought that all the pressures on the CPI were coming from these one-off factors, we held off raising interest rates. That was appropriate because we thought the inflation rate would come down.

    But there are two issues that really arose after that. The first was, we thought we were seeing some generalization of those price pressures; this was related, as the governor said, to the fact that there were beginning to be pressures of demand on capacity in certain sectors. That's a different kind of situation. The other thing is, even if they are just one-off factors, to the extent they start affecting expectations, then you run into the problem of that beginning to feed into behaviour.

    The experience of the last 10 years has certainly, to me, been very persuasive to the effect that if you have this low and predictable inflation, you're going to have a better functioning economy than otherwise. We've had a much more stable economy over the last 10 years than we had in the preceding 20. Low, predictable inflation is a means to an end, as the governor said, the end being a well-functioning economy.

    It was only in January we started to interpret those inflation numbers a little differently. Yes, a good part of it is one-off, but there is something more fundamental going on. That's when we started to think about, once again, putting a little bit of restrictiveness into the system; otherwise, you might get into a situation where the inflationary pressures really begin to take off, and that was the worry.

    Ms. Judy Wasylycia-Leis: I hear what you're saying. I suppose one could argue the economy is stable at one level in terms of the fluctuations, the ups and downs, and the topsy-turvy nature of the economy. But a vast majority of Canadians are hungry for new employment opportunities and ways to deal with the increasing pressures on their families.

    I know you've said the economy is healthy and the labour force is increasing. I'm not sure if you said anything on unemployment, but it's stable at 7%, I think, so we still have a high unemployment rate. We still have dropping family incomes. We have an increase in the labour force participation rate, but that's with a lot of older people going back into the labour force, working at low-paying jobs, and a lot of people combining several part-time jobs just to eke out an existence.

    It's not just New Democrats who are saying this; I think Judith Maxwell recently said we have a low-wage economy in Canada. In that context, would it not make more sense to look at tools other than interest rates to stimulate the economy and offer a new level of stability? I come back to the question, are there not other tools in your tool box to use rather than putting so much focus on inflation or on interest rates, which I think and others have said can have a potentially negative impact in terms of employment growth and deflation of the economy generally?

    The Chair: Mr. Dodge, would you like to answer.

    Mr. David Dodge: Yes, there are other tools. There are four major sets of tools. One is government fiscal policy, both federal and provincial. There's the whole range of structural policies that are under the control of federal and provincial governments. There's trade and then there's monetary policy. Those are the four legs of the chair, if you will, on which we stand.

    We are responsible for one of those. If we do our part appropriately--and that's what the inflation targeting regime is designed to do--if the fiscal authorities keep a rough balance on that side, and then if the microeconomic authorities and the trade authorities manage to keep things moving, when we do all of those, we in fact achieve the greatest progress.

    They're difficult. None of this is particularly easy, but I would say that the results of the difficult policy decisions in all four of those areas taken by the bank, by the federal government, and by provincial governments over the past 10 or 12 years are in fact going to give us better performance. The thing is, we just have to keep working away at it. It's not easy.

º  (1635)  

    The Chair: Thank you very much.

    Now we'll go to Mr. Murphy.

    Mr. Shawn Murphy (Hillsborough, Lib.): Thank you very much, Madam Chair. Thank you, Governor. Thank you, Mr. Freedman and Mr. Jenkins.

    Mr. Governor, I just want to touch on an area perhaps not normally considered part of conventional monetary policy but one that I think is having monetary policy considerations, and that's the North American equity markets. The economy seems to be going along fairly well, corporate profits are reasonably good, and corporate profits as a percentage of GDP are reasonably high. But that being said, we have this disconnect between the economy and the stock markets. There are all kinds of factors that go into the stock market, as you know, and no one's going to predict it, but this seems to have been going along for, I think, about two or two and a half years now, and I think it's having monetary policy considerations.

    You've identified in your report that the increase in the insurance premiums is fundamentally caused by the loss of returns by the insurance companies. We have the whole wealth factor with people losing a lot of their assets, which affects consumer confidence.

    Also, another area I want to cover later is the whole issue of under-funded liability in the public and private pension plans. I sense that there are some monetary considerations there, and I know you're going to resist the temptation to get into any predictions on the stock market as to where it's going.

    This disconnect--and we'll always have disconnects there--seems to be unduly long. My question to the bank is, do you see it having monetary policy considerations, and if it does continue for, let's say, another year or year and a half, do you see these considerations becoming unduly adverse?

    Mr. David Dodge: Let me start by saying that probably, if there was a disconnect, it was in 1998, 1999, and 2000. What we're seeing is, in some sense, a bit of a reversal of the disconnect that took place then. Obviously, a fair bit of paper wealth disappeared after 2000, just as it had appeared after 1997 or 1998.

    From our point of view and from the point of view of the real economy, the real question is, to what extent do firms have access to capital, whether it be equity capital, whether it be debt capital, or whether it be bank loans? To what extent are overall credit conditions restraining what they would like to do?

    Certainly, at this point in time and certainly, again, compared to last fall, what we've seen is that the credit spreads for riskier firms begin to come in and that there is less restriction in those markets for riskier firms. So at this point in time we don't really see access to capital as being a major impediment to growth either for a small or medium-sized enterprise or for a large enterprise outside certain sectors where risks are clearly extraordinarily high.

    But let me turn to Chuck because it is his job to watch this.

    Mr. Charles Freedman: I would just add one point to that. You asked two questions, the causes and the effects. The effects are really what's relevant as we go forward. When we make decisions on interest rates in the context of our monetary policy framework, we're taking into account all factors that affect demand. Clearly, the stock market is one of them. It affects through wealth effects, cost of capital effects, confidence, and so on, and we always take that into account.

    It's more important in some countries than in others. It's probably most important in the U.S. because a higher proportion of their people hold stocks in their portfolios than almost anywhere else. There are also a number of indirect effects of the sort you mentioned, say, through the insurance companies and the reduction in the returns on their portfolios.

    All that feeds into this general decision we make. Obviously, as you said, it's one of the factors feeding into monetary policy decision making through all the elements by which it affects aggregate demand and then indirectly inflation.

º  (1640)  

    Mr. Shawn Murphy: “Disconnect” is perhaps the wrong term, but it seems that when the economy is going well, you expect the stock market...and I guess the disconnect may have been five years before now; this is reality.

    Let's speak hypothetically and say, if stock markets dropped another 10% over the next 12 months, what would the monetary policy implications of that be? I'm talking about insurance premiums, and there are all kinds of pension plans. Is this something that concerns you?

    Mr. Charles Freedman: It's something we take into account, as I said, through all the different channels we've talked about. And there are a lot of different channels; it affects the investment side through the consumption side. You have the ability of firms to access capital and there's the governance; all this feeds into it, so this is one factor--and an important factor--of many factors.

    I'll give you another example. Let me turn it around. If, for example, stock prices were considerably higher than they are now, that would probably mean households would be spending more and that would in itself tend to make us more likely to be restrictive in terms of the monetary policy process because it would mean there would be a lot more demand in the system and a lot more upward pressure. If, on the other hand, it was the reverse and this meant that there was a lot less consumption than we thought, that would indeed affect our thinking as to what the appropriate setting of interest rates was.

    When we set out our scenarios in the “Monetary Policy Report” and draw implications for what is likely to happen to monetary stimulus in the economy, that is a conditional statement; we think such and such and such, and that's going to happen. If something else happened of the sort you described, then we would reconsider the path for interest rates in line with our attempt to try to balance supply and demand in the economy and hence make sure that inflation is near the 2% mark.

    You've raised an important point, but it's one of many, many things that do fit into the supply and demand equation. We talked about the exchange rate before, and that's one factor. The stock market is another factor, and the chartered banks' willingness and ability to extend credit is another one. House equity is yet another one.

    I'll give you an example. In the early 1990s in the United States the banks were very loath to extend credit. They went through a form of credit crunch, and interest rates were considerably lower than they would have otherwise been. The same thing happened in 1997-1998 with the East Asian crisis. As we came out of that, the circumstances changed and interest rates changed.

    So in a sense you always have to think of our own approach to setting interest rates as following from the kinds of effects we see happening out in the real economy affecting demand and supply. As I say, the point you've raised, the equity situation, is an important one, but it's one of many we take into account.

    The Chair: Thank you very much. Thank you, Mr. Murphy.

    Mr. Pillitteri.

    Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Madam Chair.

    Governor Dodge, Mr. Freedman, and Mr. Jenkins, it's always a pleasure to see you here looking into that crystal ball of yours. I'll be asking some question on behalf of the business people or the tourist industry to see what guidance you could have.

    One thing that's puzzling to me is the one-hat-fits-all umbrella specifically within the tourist industry, where we have the cost of oil going up. It's not something where we can pass on the costs relatively quickly. It's not a manufacturing industry, and with the price of gas, well, one sells a package abroad a year in advance and has no time to adjust.

    Another thing is the changes that have happened in the tourist industry since 20 years ago, when there was more seasonal job creation. Today it is much more year-round because in competing for the tourist dollar we are competing with the Europeans and we are competing with the Americans. No longer is Canada seasonal as a tourist area; we are getting long-term, steady job creation. In the downturns these businesses have to carry a lot of labour that is non-productive at times in order to make sure the labour is there to provide the service.

    You just wonder what happens in cases such as the war in Iraq, where the tourist industry has been taking a hit. Now, it's not only Toronto, but Toronto is a main point of entry within Ontario. Representing Niagara Falls, I know that we have the third-largest group of tourism operators of any Canadian destination. We have 18 million tourists in Niagara Falls and 3 million in Niagara-on-the-Lake, so something like this takes effect right away, immensely.

    You responded to a question saying you hope that in the last quarter we'll come back, but let me also explain to you that, for example, the tourist season for the Japanese market is at the end of April and in the month of May. They've cancelled out and they're not coming back this year. This has an effect, a very direct effect, especially now with the World Health Organization. Yes, they have changed their position, but it's gone, it's no longer there, and the Chinese market is nowhere to be seen in Canada this year.

    I just wonder, instead of being so fast and active in raising the interest rate, maybe you should have reconsidered so this would be more in line with that of the United States. The last time, in March and April, you brought that up 0.25% or 0.5%, yet in the United States it has not gone up, so we're relatively higher than the United States. Of course, this has also had a trickle effect by also raising our Canadian dollar relative to that of the United States, and that's one of our most competitive markets.

    I just wonder, it has this ripple effect, where we take the first hit yet we are the last ones to come out of it. The tourist industry takes the most direct hit, yet we have nothing to compensate for it or that lets us pass on this cost of doing business.

º  (1645)  

    Mr. David Dodge: I'm going to let a native of St. Catharines answer that question, but--

    Mr. Paul Jenkins: I knew you were going to do this.

    Some hon. members: Oh, oh!

    Mr. David Dodge: --let me start by simply making the point that it's very important that we in Canada set policies that are appropriate to the Canadian situation. Indeed, the world is best served if monetary authorities around the world look after their own knitting at home; that actually works best for the world economy, but certainly for us, we have to look after our own. We are setting policies that are appropriate for our overall situation.

    Now, I'll turn to Paul for a Niagara Peninsula perspective here.

    Mr. Paul Jenkins: First of all, I'll just indicate that I hear this not only from you but from a number of still very close friends in the Niagara Peninsula who are in the tourism industry and who I have regular contact with as I stay in touch with developments in that part of the country.

    As the governor said, our responsibility is to run a national monetary policy and to look at the national perspective. Your comparison was with the United States. In many respects what we're seeing in Canada in terms of our monetary policy response is the fact that we have had an economy that has performed considerably better than that of the United States on the basis of virtually any measure you can point to: employment in many sectors, overall economic growth, and improving profitability.

    We have to look at sources of demand both within our economy as well as demand for our products and services outside Canada. Within Canada in the last year or two we've seen very, very strong domestic demand. So for us it is a matter of balancing and looking at the add-up of that information at the aggregate level across all sectors, including tourism, and across all regions. We have to ensure that we have a balance between overall demand and what the economy can produce on a sustained basis to keep inflation close to that 2% rate and, through that, to provide a stable environment for sustained growth in Canada.

    That's certainly what we have been doing recently and will continue to do.

º  (1650)  

    Mr. Gary Pillitteri: To follow up on the interest rates, I do understand that yes, you have to do it with a policy that benefits Canada and not have to look outside Canada.

    There's another venue; we not only have the tourist sector, but I'm also talking about the processing and food sector, where it has been said--and we know quite well--that if that Canadian dollar were to get up to 71¢ or 72¢, a lot of the food processing we have in Canada would be lost.

    I just wonder if you're looking at where all of a sudden we have seen in the last three months the dollar go from 63¢ up to 69¢. Looking at the future, not only am I considering the tourist industry, I'm touching on the food processing industry, what little we have left in Canada. Is that under consideration, where the dollar is going and where you'll start to really change and reconsider interest rates?

    Mr. David Dodge: Just think back to when we were here at this committee a year ago. The problem was exactly that we were at 63¢.

    As we said before, the bilateral exchange rate with the U.S. is clearly one factor as we look ahead that has an impact on the likely balance between supply and demand and hence on the outlook for the economy. So yes, it along with other factors is clearly something we take into account.

    I would just make one observation. Something is really surprising to me coming back to this game after a number of years, and that is, what economists call the “law of one price” doesn't seem to hold quite as much as we thought it did. In fact, we can get really quite large divergences between Canadian and U.S. prices even though you just move across the border and even though stuff is freely available on the Internet. While the exchange rate obviously feeds very directly through into those traded commodities that trade on the Chicago exchange, AMEX, or something like that, that feeds through very quickly.

    For most manufacturing and services, those prices tend to be set in the context of a domestic market. If our domestic market is strong, then the Canadian dollar prices will tend to move up a little faster than one might otherwise expect. If the market is weak, as it was during a period of depreciation, in fact the exchange rate effect doesn't feed through into core inflation nearly as fast as we would have thought 20 or 30 years ago.

    The interesting thing is that's not a finding just in Canada, but the Australians, the New Zealanders, and the British have found exactly the same thing. There's been quite a change in the way markets operate over the last 30 years.

    The Chair: Thank you very much, both of you.

    Now we're going to go to five-minute rounds, the second round. Colleagues, if you could, keep the questions shorter, and I'll ask that our answers be shorter. It's harder to cut the witnesses off, though, it really is. I can do it to my colleagues and they'll forgive me.

    Go ahead, Mr. Penson.

    Mr. Charlie Penson: Thank you.

    We've been talking a lot about monetary policy here, but in addition to that, my understanding is that you manage the federal debt for the Government of Canada. My first question would be, what's your advice these days? Are you trying to lengthen out the term of these interest rates? What is happening in terms of the rollover of Canadian debt?

    Mr. David Dodge: I'll be very brief there.

    At the time of the budget the government put out a plan as to how it was going to move going forward. As you know, we had moved quite dramatically in the early nineties, when there was a lot of fear about whether we were going to be able to borrow. We decided to move out our debt long, which meant additional cost for the Canadian taxpayer but reduced risk because we wouldn't have to roll it over.

    We now have an environment where fiscal policy is stabilized and where inflation is stabilized, so we provided advice to the Government of Canada that it was prudent to save the taxpayer some money by moving a larger fraction of the debt into the short end of the market. That could be done at very reasonable risk and over time would save the taxpayer money. That is the real advantage of having achieved low, stable, predictable inflation and having a ratio of public debt to GDP that is on a firm downward track.

º  (1655)  

    Mr. Charlie Penson: Mr. Dodge, given that we are at almost historically low interest rate levels, would it not be prudent to move some of that “long” now--unless they are planning on paying it off a lot faster than I think they are?

    Mr. David Dodge: Not for an institution of the size of the Government of Canada. Our interest rate on Canada's debt, whether it be three-month bills or in the 30-year market, really forms a basis for the operation of debt markets throughout the country. You don't try to manage this in such a way as to generate big swings in the amount of debt that is out there. That debt forms a very important base for the operation of financial markets in this country.

    We don't try to manage that closely. What we try to do is manage over the medium term. That's why we had the increase of the ratio of long- to short-term debt in the early nineties when we had fiscal problems, and that's why we are able to reduce that today.

    Mr. Charlie Penson: Is it because we're talking about such a huge amount of money here, $500-some billion?

    Mr. David Dodge: First, these are big amounts of money. Second, as I said, we're not playing a game here of trying to manage the public debt in such a way as to take advantage of the existing slope of the yield curve, because what we do affects very much the slope of the curve. We do it over a medium-term perspective.

    Mr. Charlie Penson: If I understand what you're saying, it's that by trying to achieve long-term low interest rates for the government, we are costing the Canadian public higher interest rates, and therefore there is a saw-off. Is that what you're saying?

    Mr. David Dodge: No, no, no. In fact, the experience in the last five years or six years has been just the opposite. Indeed, as we have been reducing the amount of federal debt and as a number of provinces have been reducing the amount of provincial debt out there, what that is doing is creating downward pressure on interest rates and allowing corporate borrowers into the market. It actually works in just the opposite direction.

    Mr. Charlie Penson: Do you provide advice to the Minister of Finance on the bank merger issue?

    Mr. David Dodge: No, we don't.

    The Chair: Thank you very much.

    Now we'll go to Mr. Valeri, please.

    Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Madam Chair.

    I have a couple of questions. I don't know if I'll get them both in, but I'll get the one question I want in first.

    Every chance I get I like to ask about Canada-U.S. relations. There have been many analysts both from think-tanks and from inside government, certainly from Industry Canada, talking about the merits of deeper integration with the United States from an economic standpoint. I'm talking about common markets and things like that, taking NAFTA to the next level, and also about some consideration with respect to free trade in the Americas and how that will impact our economy.

    Has the Bank of Canada considered or looked at any of this? Do you have a cost-benefit analysis you've done on a customs union or some type of common market? That's one question.

    The second question I would have is, if in fact we pursue this type of economic integration, is it necessary to actually take all the steps, including monetary union? I'm not a fan of that, and you often hear when this debate begins that you're on a slippery slope, that ultimately it will be monetary union and you will lose all ability to control your own monetary policy. Can I get your reaction to that.

»  (1700)  

    Mr. David Dodge: First of all, we're all economists at the bank and our analytic function we do as economists. All our analysis as professionals would tell us that opening up or tearing down barriers to trade is in fact very important for enhancing the wealth-generating capacity of our economy. Tearing down barriers multilaterally would normally be the preference, but if we can't do it, then we can continue to tear down barriers to trade both between provinces in Canada, between Canada and the U.S., and between Canada and Mexico, indeed right through the Americas. So we are biased in favour of getting rid of barriers to trade in the sense that over the long haul that's going to generate a more efficient economy and higher incomes for Canadians.

    Now, that having been said, we talked a year ago on this very issue of, is it appropriate to have a monetary union? The very bottom line in that was, well, not in the foreseeable future. That really stems from two issues. One is that we have a long way to go to get integration in the goods market but we have even further to go to get integration in the labour market. There are still some real barriers there that would make it desirable for us to be able to make adjustments.

    Second, the structure of the Canadian economy is quite different from that of the United States economy. We don't know whether in the future there will be more convergence of structure, which is one possibility, or indeed we will actually become more specialized and rely on a more limited range of products.

    But at the moment the structures are different and relative prices between those goods and services do change. It is therefore extraordinarily helpful for Canada to have one more price in the system so we can make the adjustments and avoid either importing a lot of inflation in some periods from the United States or in fact avoid importing deflation as we adjust.

    We feel that--not feel; it's our analysis. Bankers have no feelings.

    Some hon. members: Oh, oh!

    Mr. David Dodge: Our analysis would make it very clear that for the foreseeable future the regime we currently operate under is the most favourable one for us.

    Mr. Tony Valeri: When you say that and when you talk about a regime, are you talking about monetary policy or are you talking about a customs union, a harmonization, essentially, of an external tariff?

    Mr. David Dodge: I'm sorry. I thought your question related to a monetary union. That's what I was talking about.

    Mr. Tony Valeri: No. In fact, I agree with your position on the monetary union. I do believe there are a number of barriers and that we're a long way away from that.

    My question was, do you see any barriers in pursuing a harmonization of an external tariff with the United States, a customs-type union, with the costs and benefits that are associated with that? Second, if we actually pursue that, are we automatically on track to a monetary union? I think not, but I would defer to the expertise at the table.

    Mr. David Dodge: The answer to that is no. You're right, we're not automatically on that track. I did some of the analysis for Senator van Roggen's report way back in 1980, when we were first looking at this sort of thing, so I guess I have a strong predilection for continuing to tear down the trade barriers between our two countries. I think it is indeed a worthwhile thing to do, but that certainly does not imply monetary union.

    Finally, I think one thing that is really important, something I would be remiss in not mentioning, is that it is extraordinarily important that we work with the Americans on all of those impediments to trade across the border not related to tariff but related to security and other issues. That is just extraordinarily important not only for security but for transportation, the way we handle the passage of goods and people across the border. Trying to make sure we don't have, if you will, bureaucratic barriers to the movement of goods and services and people across that border is very important.

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    The Chair: Thank you.

    We'll go to Ms. Leung.

    Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Madam Chair. Thank you, Governor, Mr. Jenkins, and Mr. Freedman.

    This morning I had a chance to visit the Canadian Bank Note Company, where they make Canadian money and passports. Unfortunately, they didn't give us any samples.

    Some hon. members: Oh, oh!

    Ms. Sophia Leung: I will focus on the dollar for my question. With the recent increase of the Canadian dollar to 69¢, I understand it affects our export industry. At what point does an increased Canadian dollar start to slow down the export growth and slow down overall economic growth? That's my first question.

    Mr. David Dodge: There is no single point. There is no magic number out there one can point to, number one. Number two, it certainly does depend on the reasons for which we have changes in the exchange rates. If those reasons are fundamentally driven by real economic factors, then indeed that price, the price of the Canadian dollar, is doing exactly what it is supposed to do, and markets are helping in fact with the adjustment process.

    The one issue, and this is where the judgment comes in, is whether those movements are coming about because of some sort of exogenous or autonomous portfolio shift as opposed to the real factors. In that case, then indeed one has to begin to think a little harder.

    If you'd like more on that, here's the expert, but as I said earlier, where we are sitting right now in terms of the bilateral exchange rate is just about exactly where we were three years ago; we went down and we've come back up. That's been appropriate through the adjustments that have been going on in our economy.

    Ms. Sophia Leung: When we have a weak Canadian dollar, it has kind of encouraged companies, and they have a profit from the weak dollar rather than from investing in more productivity and progress. Now we have a higher Canadian dollar, just a few cents, but does that really encourage our productivity and growth?

    I have one more question. What does the Bank of Canada consider to be a fair and justified price for the Canadian dollar?

    Mr. David Dodge: Exactly what it is right now--

    Some hon. members: Oh, oh!

    Mr. David Dodge: --and that is always the answer. It's just like the question, what is a fair wage? The answer to that is, it's always exactly 25% more than you're being paid. What happens is, at a point in time the markets tell you what the right price is.

    For the first part of your question, I go back to the answer I gave a little bit earlier. We have been going through a number of adjustments in this country, and part of the depreciation we had vis-à-vis the United States over the latter part of the 1990s, after the Asian crisis and so on, was very real. That helped us to adjust through a period when the prices of what we sold abroad were weaker and where we could have had some real potential negative growth impacts.

    We are now a stronger economy. There are real factors at work that would suggest that indeed it was appropriate to not have a 63¢ dollar. That's exactly the point I made in February 2002, that we were in that part of the cycle where it was not helpful in terms of this adjustment process to have a bilateral exchange rate as low as it then was.

    If you want all the song and dance on portfolio, here's the guy to give it to you. It is a really important issue.

»  (1710)  

    The Chair: Thank you.

    We'll go to five minutes and Ms. Wasylycia-Leis.

    Ms. Judy Wasylycia-Leis: Let me follow up on some of the questions swirling around this whole debate in terms of the integration of the Canadian and U.S. economies. You haven't said today, Mr. Dodge, that you're supporting deep integration or dollarization or harmonization of monetary policy, but you are advocating a closer relationship economically through breaking down trade barriers.

    The reality today is that the Canadian economy appears to be relatively strong, as you've pointed out. It's one of the best in the G-7, and the U.S. economy is in difficulty. There's a major slowdown. What would be the point of tying our economy in any way, shape, or form to the American economy, given that context? A related question is, is there a role for the Bank of Canada to help our country from being sucked down into that vortex of a declining U.S. economy?

    Mr. David Dodge: I'll take the first question. Barriers to trade are unhelpful whether they're barriers to trade between Canada and the United States, between Canada and Europe, or between Canada and Asia. We benefit enormously in many ways from being an open economy.

    If you want to go to the extreme other end, you're looking at an economy such as Argentina's, which was very much like Canada's at the end of the Second World War. The big difference is, we progressively opened up to trade over the period and they shut it off. Perhaps there's no greater reason why we now have a per capita income roughly three or four times that of Argentina than the fact that we have kept ourselves open to the world.

    It's not so much the issue of integration, it's just getting rid of the barriers both internally and externally to the flow of goods and services and, I would add, people. We've done really quite well in getting rid of the barriers to the flow of capital, and we benefit a lot from that.

    Second, the very way you phrase the question is really the answer. We think there are real advantages to having an independent monetary policy so we can in fact deal with situations in Canada that are different from those in the United States. It's a tremendous advantage we have.

    You don't give up that sort of advantage, that flexibility, lightly. There are some costs to it in the sense that transaction costs are a little bit higher in doing business across the border. Our analysis would say, the benefits just far outweigh the costs and will do so for the foreseeable future.

    The Chair: Go ahead.

    Mr. Paul Jenkins: Madam Chairman, I just have one quick comment in response to the characterization of the U.S. economy. As the governor explained earlier, we really do see the U.S. economy beginning to gain momentum as we go through this year and into next year. When you think back over the situations the U.S. economy has had to deal with for the last two or three years, its overall performance continues to be relatively good, certainly when you compare it to the situation across the Pacific and in some of the European countries. They have difficulties they are dealing with at the moment, but when you look through the economic disruptions it's had to deal with, that economy continues to show a lot of flexibility, and we've certainly benefited from that.

»  (1715)  

    The Chair: Thank you.

    You have 20 seconds.

    Ms. Judy Wasylycia-Leis: We've heard about interest rates and the issues about the options available to the Bank of Canada. Certainly, we could spend some time discussing that, but one option you do have is not to increase interest rates, knowing the impact on employment growth and creation could be quite negative.

    My question to you is, do you recognize, do you acknowledge, that there is that link, that a possible impact is there? Is it therefore only with the greatest reluctance you would increase interest rates, or is it that you're prepared to see some increase in unemployment or a lack of employment growth in the interest of a stable response on the inflationary front?

    Mr. David Dodge: Monetary policy does matter, let's be very clear. We try to run it in such a way as to keep us operating just at that fine point where we're fully using capacity but not putting a lot of excess pressure on prices. Nor do we want to operate well below capacity either; we'd like to stay right there. That is obviously part of the judgment calls we have to make every time we sit down on a fixed action date to make the decision.

    The experience we've had and the experience other countries that have adopted inflation targeting regimes have had is that these regimes actually do serve to keep you closer to that point and that we don't end up going through periods of boom and bust. The evidence, both domestically and abroad, is that this is the right way to go.

    Now, it's absolutely clear that when we have a monetary policy that is restrictive--and I would point out that at the moment we still have a rather stimulative policy--it is clear we're doing that because we think we're well above capacity. When we have a very loose one, we think we're doing it because of the danger we would open up a huge gap between what we can produce and what we are producing.

    The Chair: Thank you very much.

    Mr. Peterson.

    Hon. Jim Peterson (Willowdale, Lib.): Thank you.

    In addition to interest rates, to what extent today does the bank use money supply as an economic tool?

    Mr. David Dodge: Well, we watch the numbers because there's information in those numbers. But it's not an operating tool, it's an information source.

    Mr. Jim Peterson: The bank does or can influence money supply. It has various ways of doing so.

    Mr. Charles Freedman: But it only does so through the interest rate movement. Interest rates affect the monetary aggregates both directly and because with low interest rates certain monetary aggregates grow, also because of its effect through demand in the economy. We don't actually have any direct link between what we do and money in a very mechanical fashion.

    Mr. Jim Peterson: None whatsoever? Okay.

    Has the risk of international financial crisis been attenuated in any way since 1997 through measures such as the creation of the G-20 and others?

    Mr. Paul Jenkins: I think the answer to that is yes. There are a number of initiatives we've taken that we can point to in order to provide evidence of that. Through the international financial institutions we've been very active in promoting measures to prevent crises, using and implementing best practices.

    This is where your reference to the G-20 is very important. Through the G-20 we're able to promote and encourage not just the members of the G-20 but other countries in geographic areas to pick up these best practices in terms of regulation, supervision, and running monetary policy. A lot of these countries have actually adopted a framework not dissimilar to our own. As well, we've been working very hard on tools to resolve crises when they do materialize, putting in place incentives so they get addressed more quickly.

    I think the answer is yes. A lot of progress has been made in a number of areas for us to work towards both preventing them and resolving them when they do occur.

»  (1720)  

    Mr. Jim Peterson: Are there still further measures you would like to see taken in those areas?

    Mr. Paul Jenkins: The most important for us in many respects is the implementation of an action plan that was agreed to at the last G-7 meeting, which has a focus on both prevention and resolution. I believe we now have a framework in place, and the task is to actually implement that and ensure that, through the International Monetary Fund and other organizations that have been set up post-the Asian crisis, these new practices are actually put in place.

    Mr. Charles Freedman: I'll add to that. Through the G-20 we can form other mechanisms. There have been a lot of developments that, I think, have acted in the direction of lessening the likelihood of financial crises. For example, most of the financial crises in the 1990s were related to countries that were on a fixed exchange rate. Most of those countries are now on a floating exchange rate, which in itself avoids the kind of situation where you have really speculative pressures bringing a currency off its peg and the kind of difficulties, distortions, and problems this gives rise to when you have a fixed exchange rate.

    We have the regulators, the treasuries, and the central banks of the G-7 countries and other countries, the standard setters, getting together twice a year to talk about these issues and trying to work through them to make sure we're on top of what might happen. Paul mentioned the standard setters. That's been very, very important.

    Across the world, people have been working to try to improve their domestic financial systems. One aspect of this is that many of these countries are trying to develop domestic long-term bond markets, which again will be very helpful over time. This isn't going to happen overnight in many of these countries, but trying to improve their domestic financial system in and of itself will lessen the probability of sharks feeding upon themselves and really causing major problems within the countries, problems that then feed into other countries.

    There is still a lot of room to go, but we have made a lot of progress over the last five or six years.

    Mr. Jim Peterson: How about the issue of standstill clauses, etc., for solving debt as another way of dealing with international financial crises?

    Mr. Paul Jenkins: Absolutely. This is part of the action plan I mentioned a moment ago. The components of the crisis resolution aspect of that does recognize and promote the use of collective action clauses as one mechanism to deal with these coordination problems we've seen in the past. Mexico has now introduced these. Brazil has just today put out a new bond issue that incorporates these collective action clauses.

    So you can see progress being made on a number of different fronts, and I think all of this is going to continue to require attention to ensure we're moving forward. But again, the framework is much improved and the components are being put in place.

    Mr. Jim Peterson: Could I just add, Madam Chair, that I think Canada has taken a major role of leadership in these very important areas since 1997. The bank as well has played a major role in that.

    Thank you.

[Translation]

    The Chair: Mr. Paquette, please.

    Mr. Pierre Paquette: Thank you, Madam Chair.

    I'd like to come back to the range of 1% to 3%, at least so that we have a bit of a grip to prevent the craziness of the early 1990s.

    You say in your document that you do expect that it will be 3% in the middle of the year. So you're saying that around June and July, inflation should be 3%. Mr. Jenkins told us that at 3%, restrictive pressure is maintained to get closer to 2%. Conversely, if we were at 1%, we'd have a policy rather...

    I ask you this question. What is the difference between having an inflation rate of 3%, when we're supposed to have a range of 1% to 3%, and having an inflation rate of 3.1%? What will the attitude of the Bank of Canada be? Is there not any difference, or is there actually a difference and that range doesn't really mean anything? Or is it that the target has not really been changed so as to set 2% as the lasting target, regardless of what happens?

»  (1725)  

    Mr. Charles Freedman: What's very important is that we have a target that--I don't know exactly how to say it in French--is soft-edge rather than hard-edge, that is, that the difference between 3 and 3.1 for a month or two is not much.

    In the past, there have been countries that have made a lot of noise about this, but I don't think that's the approach to take. From the beginning of our inflationary target approach, we have always said that even if the inflation rate was a little higher than our range, we would get back to the target, but gradually. That's very important. That's exactly what we're doing now.

    What we're doing now is going back to 2% gradually. We hope, we expect the inflation rate to decrease, because the one-off factors are going to disappear. But besides, we don't want pressures on capacities to be greater than they are now, because if they begin to grow, that can create upward pressure on the inflation rate.

    One thing that I also wanted to say earlier that is very important is that the fact that we have a more restrictive policy is not less stimulative. That's very important, because if we compare with the United States, of course, they're at 1.25%; we're at 3.25%. But Australia, England and New Zealand, which are countries with pretty strong economies, have much higher inflation rates than we do. New Zealand lowered its rate, if I recall correctly, to 5.5% or 5.25%, and we had a much sharper drop than those countries at the end of 2001, and now, we're getting a little stimulation out of it. But as Gordon Thiessen said when he was governor: we're not putting on the brake, we're taking the foot off the accelerator.

[English]

    we're not putting on the brake, we're taking the foot off the accelerator.

[Translation]

    This is a fairly important difference, I'd say.

    Mr. Pierre Paquette: Do I still have a little time?

    Another thing that surprised me was that I recall that in the Bank of Canada's monetary policy reports, there was a great deal said about public finance; we can certainly understand why, with the rising deficits and debt.

    Having said that, there's still a worrisome situation now in the provinces. There are already provinces that are in deficit. Quebec is in an extremely fragile situation, and apart from Alberta, we can say, generally speaking, that it's fragile everywhere and if there were a recession, we could end up back in deficit, while we know that the federal government has surpluses, what we call tax disparity.

    I'd like to know if the Bank of Canada has done any studies, simulations, of the public finance situation, including the provinces.

    Mr. David Dodge: The government sector, including the provinces, it's there... The effect of fiscal policies, it's all the influences of the governments and also retirement funds. So, right now, in Canada, we have a surplus in the national account in these three areas: provinces, federal and retirement funds, of about 1.5%, I think. That was in 2002.

    In 2003, we expect a reduction in these surpluses, which will help the economy not to loosen up so fast. Furthermore, we don't have to change taxes and expenditures like in the US, because we had this room to manoeuvre.

    So, I do think that the internal policy of the federal government and the provinces is to continue to reduce, modestly but significantly, the public debt, and that will help the Canadian economy a lot in the medium term and enable Canada to be ready for the middle of the next decade when people like me will be retiring.

»  (1730)  

[English]

    The Chair: Thank you very much.

    First of all, Mr. Freedman, on behalf of all my colleagues around this table, I wish you very well and I thank you for all the valued work you've done over many, many years.

    To Mr. Dodge and Mr. Jenkins, again, thank you, and we'll see you again.

    For my colleagues, I'm going to suspend for just a minute so you can quickly thank our guests, and then we'll have the bells ringing for votes.

    I would ask the media to take the interviews outside the door so we can do a quick in camera meeting before going to vote.

    We are suspended for about two minutes.