[Recorded by Electronic Apparatus]
Wednesday, May 15, 1996
.1537 
[English]
The Chairman: Order. The finance committee of the House of Commons is very pleased to welcome the Governor of the Bank of Canada, Gordon Thiessen, accompanied by Mr. Paul Jenkins, the deputy governor.
We look forward to your comments, sir.
Mr. Gordon G. Thiessen (Governor of the Bank of Canada): Thank you very much,Mr. Chairman. I'm pleased to be invited to appear before this committee to discuss our spring Monetary Policy Report, released last week.
I must say, my colleagues and I regard this regular semi-annual session with your committee, Mr. Chairman, as an important part of our accounting for our conduct monetary policy.
[Translation]
In each Monetary Policy Report we present the Bank's assessment of the current trend of inflation and outline the monetary policy actions that we felt were necessary to keep that trend within the Bank's target range of 1 to 3% for inflation control. The reports also provide the Bank's outlook for inflation in the near and medium term and give some insight into our analysis of economic indicators.
[English]
If I may, Mr. Chairman, I would like to repeat what I've told you before about the operation of our inflation control targets. As we note in the report, these targets are not an end but a means by which the bank contributes to the good performance of our economy. An economy functions better with low inflation. As well, by taking actions to hold inflation within our 1% to 3% target range, monetary policy acts as a kind of automatic stabilizer for the economy.
When the economy is strong and is pressing the limits of capacity, with the risk of pushing inflation through the top of our range, the bank will act to tighten monetary conditions. In exactly the same way, a weak economy that may result in the trend of inflation falling below our target range will lead the bank to ease monetary conditions.
.1540
Let me amplify why we believe it is so important to keep the trend of inflation inside our target range.
This is a commitment we've made to Canadians to provide them with a high degree of certainty about the general level of prices in the economy. Confidence in a stable value of money through tight inflation control makes it easier for Canadians to make plans and to take sound decisions about savings, investment, production, and so on.
Our responsibility is to act promptly if there is evidence that the trend of inflation risks rising above or falling below our target range. Such prompt action minimizes near-term uncertainty about price movements and encourages expectations among Canadians about the future trend of inflation, expectations that remain consistent with our target range.
[Translation]
Our measure of core inflation in the Consumer Price Index moved into the lower half of the target range in December of last year. At the same time, despite Canada's strong export performance in the second half of 1995, the overall pace of economic activity was slower than expected, to a significant extent because of weak consumer confidence. As a result, the margin of unused capacity widened and downward pressure on inflation continued.
[English]
In this climate, the bank has reduced its operating band for overnight interest rates on six occasions since the end of October, easing monetary conditions by about 200 basis points, to the lowest level in about two years. Financial markets responded positively to these actions. Money market rates declined broadly in line with the overnight rate, and there has been, on balance, an underlying firmness to the Canadian dollar.
This improved sentiment in financial markets has reflected Canada's good inflation performance, progress in achieving budget deficit reductions, and the sharp improvement in our external trade and payments position in the second half of 1995.
The bank has taken a measured approach in its actions to lower interest rates, in order to foster as much understanding of these improved economic conditions and as little uncertainty about our intentions as possible.
[Translation]
The prospects for 1996 look promising. The U.S. economy, the most important element in Canada's external economic environment, appears to have returned to a path of steady growth. Domestic demand should also improve in the coming months, encouraged by the significant drop in short-term interest rates.
[English]
All told, both external and domestic factors suggest that economic activity will expand faster in 1996 than in 1995. Nonetheless, it is unlikely that slack in the economy will be taken up in any significant way before the end of the year. Thus, we expect our core measure of inflation will remain low, in the lower half of our target range, through 1996.
However, monetary policy has its effects over the medium term and must be forward-looking. As we look to the medium term, there are a number of uncertainties about how the Canadian economy will unfold.
[Translation]
While the expected pickup in economic activity should take up some of the slack in the economy through 1997, it might still leave significant unused capacity in the economy. Such an outcome raises the possibility that a year or two from now the trend of inflation might fall below the lower limit of our target range. An easing in the desired medium-term path of monetary conditions would be implied to counter such a trend.
.1545
[English]
But as I said, there is a lot of uncertainty at this moment, particularly about consumer confidence, so we must also consider the possibility that the significant easing of monetary conditions over the past six months may lead to a pronounced turnaround in consumer confidence. Such a reversal in confidence could result in a much stronger economic upswing and less concern on the part of the bank about the downward pressure on the trend of inflation.
So, Mr. Chairman, we will be examining the economic information very carefully over the coming period in order to come to a judgment about the balance of risks regarding the trend of inflation.
My colleague Paul Jenkins and I will be pleased to respond to your questions now,Mr. Chairman.
The Chairman: Thank you, Mr. Governor.
Mr. Loubier.
[Translation]
Mr. Loubier (Saint-Hyacinthe - Bagot): Welcome, Governor.
I have two questions for you regarding the Bank's policy. A study was recently released byMr. Robson of the C.D. Howe Institute as well as by Mr. Laidler. It concluded that in 1990-1991, the Bank's monetary policy slowed the pace of economic recovery and that shortly after you became governor, that is in late 1994, early 1995, an economic slowdown occurred as a result of the Bank's excessive high interest rate policy.
You yourself acknowledged last year when you released your annual report that the Bank's monetary policy had been excessive and that if a more modest rate of economic growth had been forecast for the first and second quarters of 1995, the Bank's policy would have been slightly different and a less restrictive monetary policy could have been adopted. The interest rate policy would also have been less inflexible and we would have been able to adjust to it.
I have been monitoring the situation for the past two years and I have also examined the latest inflation figures. Inflation was reportedly running at around 1.4% in March in Canada, a level in the bottom half of your target range of between 1 and 3%.
In comparing the analysis that you conducted last year with the one conducted by theC.D. Howe Institute this year, would you sat that the Bank's monetary policy is once again excessive? By putting too much emphasis on a problem which appears to be under control at the present time, given that the inflation rate is still in the lower half of the target range for inflation control, aren't you possibly jeopardizing the modest recovery that has been taking place for the past 18 months? That is my first question.
Mr. Thiessen: Looking back, we can always find some way of improving our policy. However, we have to realize that Canada's economy is greatly affected by international events. It is always subject to external pressures. Last year, for example, the U.S. economy did not perform as well as expected, in addition to which a currency crisis erupted in Mexico. These events had a profound effect on Canada. There is no possible way that monetary policy can control or reverse all of these trends.
.1550
Consequently, I find the C.D. Howe Institute study overly negative. The Institute's economists believe that we can always ignore what is happening on financial markets, particularly the Canadian dollar market, and I disagree with this. I believe we must always maintain investor confidence in the markets. Sometimes, we must adjust interest rates upward, as we did at the start of 1995, and accept the fact that our country's economy is affected by international events.
Mr. Loubier: I'm not denying the fact that when the occasional crisis erupts, as we saw with the peso last year, the Bank of Canada has no choice but to intervene to prop up the dollar and to sustain rather high interest rates for a certain period of time.
However, setting this fact aside for the moment, since your predecessor's term of office and in particular since you took over at the helm of the Bank of Canada, you have been aiming for the lower half of the inflation-control target range. I'm wondering if I shouldn't give some credence to the criticisms expressed by Mr. Robson and Mr. Laidler and if there isn't some middle-ground solution - I'm referring here to interest rates - so that even if the rate of inflation was substantially higher, the modest recovery that we have experienced over the past 18 or 24 months in terms of employment would not be jeopardized. I think you will continue to hear some criticism to this effect. You recognized this yourself last year.
On the subject of deflation, the Ottawa Citizen reported the following on May 13 last:
[English]
- ``If we're getting down to one per cent, we're getting down to potentially a deflationary
situation,'' Thiessen said, ``and that can have devastating effects on an economy.''
Could you describe for us the devastating effects of a deflationary situation? Shouldn't you be reexamining the price indexes that you currently use to set interest rates in light of the many criticisms that are being voiced today across Canada?
Mr. Thiessen: I'm sorry, but what indexes are you referring to?
Mr. Loubier: First of all, I asked you to describe for us the devastating effects of deflation.
[English]
Mr. Thiessen: Yes.
[Translation]
Mr. Loubier: My second question is somewhat related to the first. Do you not feel that the price indexes currently used to set interest rates overestimate inflation and, if so, isn't it possible that the effects of deflation are already being felt in Canada?
Mr. Thiessen: First of all, let me just say that we are not aiming for an inflation rate in the lower half of our target range. It is impossible to control the inflation rate as precisely as that. While the rate of inflation is indeed in the lower half of our range, our target is the middle of the range. This process takes time. Monetary policy can affect the inflation rate for one or two years. However, we cannot control the rate of inflation at all times.
Mr. Loubier: I would like you to clarify something for me. For example, can you control rates in the short term?
Mr. Thiessen: Interest rates? I'm talking about the inflation rate.
Mr. Loubier: I understand. However, when you are confronted with a situation where for several consecutive quarters, you have been in the lower half of your target range, don't you think it is time to ease up a little in your fight against inflation to allow for a more consistent recovery on the job creation side of the equation? You yourself acknowledged this fact last year. We mustn't wait another year to recognize ultimately that we should have eased up a little. That is what I was getting at with my question.
Mr. Thiessen: We explain in our Monetary Policy Report that we have eased our monetary conditions considerably over the past year, more particularly during the last six months, because of the very low trend of inflation and the deflationary movement in Canada.
.1555
I will answer your question in English for the sake of greater clarity.
[English]
On the occasion that I talked about deflation, I did not mean to leave the impression that I was predicting deflation. I was really trying to underline how seriously we take our commitment to keep the trend of inflation inside our target range.
I used the extreme case of a deflationary movement in prices to demonstrate why one needs to be concerned about trends both downward and upward, but I did not mean to predict that we were on the verge of deflation. The point that I and my colleagues are really trying to make here is that the trend of inflation looks very low in Canada.
The issue that we are confronted with is whether the rate of growth of economic activity will be reasonably robust and therefore take some of that downward pressure off inflation, or whether there is a case over the medium term to have easier monetary conditions in Canada.
Let me be absolutely clear. I was not predicting deflation. I was simply trying to underline that we are very committed, that we do not wish a trend of inflation above the target, nor do we want a trend of inflation below the target.
[Translation]
Mr. Loubier: In the example you gave of deflation, you spoke of some devastating effects. What are these effects?
[English]
Mr. Thiessen: If you end up with a strong momentum of prices either up or down, both of those can be bad for the economy. An upward spiral of inflation tends to lead to speculative activity, excessive accumulation of debt. A downward spiral in prices can discourage people from buying and tends to impart a weakness to the economy.
But let me say again that I am not predicting that. I'm not saying we're on the verge of it. I was simply trying to point out that it's very important for the bank to be equally concerned about being above its target or being below its target.
[Translation]
In response to your third question, we use the Consumer Price Index to calculate inflation. There is a small margin of error - I'm not clear what it is exactly - and this index is not totally impartial, but the margin is not very great, no more than one half of a percentage point. We plan to focus again on this issue this year because it is important.
In the United States, a margin of error of two percentage points is often mentioned. That is a considerable spread and it changes the situation totally. When you have a rate of inflation of 2% and such a substantial margin of error, you could actually end up with an inflation rate of 0%. That is not the case in Canada.
[English]
The Chairman: Merci, Monsieur Loubier. Mr. Solberg is next.
Mr. Solberg (Medicine Hat): Thank you, Mr. Chairman.
Mr. Thiessen, it's good to have you here before the committee. I apologize for not being here for your initial comments.
Perhaps this has already been asked. The private sector consensus for real GDP growth right now is about 2%. Does the bank share that view, and if it does, is the bank willing to cut rates further to head off the prospect of deflation?
Mr. Thiessen: A lot depends on exactly which period you're talking about. Certainly, for the calendar year 1996, annual average over annual average, yes, 2% is about where we are, or that's where most people are. That implies rates of growth of around 2% in the first two quarters, and rates of growth of around 3% or more in the second half of the year.
.1600
I think what really matters here is what you see going after that. So if we start to get rates of growth of 3% in the second half of the year, and there is some expectation that this will accelerate, then I think we're in a very different situation. Because at that stage, we are starting to eliminate some of the unused capacity in the Canadian economy. Then the downward pressure on the rate of inflation, as we have mentioned here, disappears.
Mr. Solberg: I have a question about the bank's practices with respect to the monetary conditions index. Is that something the bank relies upon?
Mr. Thiessen: Yes, it is.
Mr. Solberg: Okay. If that's the case, will a weak dollar lead to higher interest rates if that's the steering mechanism for the bank?
Mr. Thiessen: You have to think about all the other things that are going on in the economy at the same time. We don't set a level for monetary conditions and say that's where we have to be, come what may. We are constantly assessing the situation in the economy, what that implies for the trend of inflation and what that in turn means for an appropriate path for monetary conditions.
So if the dollar were to strengthen and everything else were to remain the same, there is no reason to think that a stronger dollar meant a stronger economy and more upward pressure on economic activity. Then if that level of the dollar seemed likely to persist, we would seek to counter it with lower interest rates. But if the dollar was going up, for example, because we had a commodity price boom going, and the Canadian economy looked as though it was about to burst into really rapid rates of growth, then we might not.
Mr. Solberg: Mr. Chairman, I'm going to pass for now.
The Chairman: Thank you, Mr. Solberg. Mr. St. Denis.
Mr. St. Denis (Algoma): Thank you, Governor, for being here.
You mentioned in your presentation that there was capacity in the Canadian economy, which can be a good thing, especially, as you've said, in a growth environment, where it gives us the room to grow without necessarily creating problems with inflation. Do we have a quantifiable method to measure that room to grow, and if so, where are we on that scale? Can we from that feel some comfort for a little while, into the next couple of years, in terms of growth capacity?
Mr. Thiessen: Absolutely. In our Monetary Policy Report we give an indication of our estimation of where the use of capacity is relative to the total potential output of the economy. We indicate there that the unused capacity is roughly 2.5% to 3%. But let me say to you, this estimation has a wide margin of error on it. This is a difficult calculation to make. One must make them. It's important to do so. But you don't want to be too precise about it.
I think the general point is, yes, there is scope for the Canadian economy to grow relatively rapidly over the next few years without generating a lot of inflation pressure - or any inflation pressure.
Mr. Paul Jenkins (Deputy Governor, Bank of Canada): If I might add a couple of points to that, looking out over the medium term, the potential growth rate consistent with these numbers would be in the order of 3%. So you could look for a growth rate in excess of 3%. That slack would only be taken up over a period of time.
So the answer to your question is yes.
.1605
The Chairman: Ms Brushett.
Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chair.
I have a couple of questions. The first one is about the harmonization of the GST. That will be lowering the combined sales tax in the Atlantic region. However, it will not be implemented for some time. If there is a reservation in the purchase of big-ticket items in the consumer marketplace until the tax is implemented to get that savings, will the bank intervene, and what might you do to stimulate the economy?
Mr. Thiessen: Well, I guess it's really a question about how important that's likely to be, how much you're going to have people delaying. That's hard to say right now.
One thing I must say, however, is that when we look at inflation and are measuring its trend, we take out of it any effect from a change in indirect taxes. When we're looking at inflation, we don't look at the fact that it's blipping up because one has widened the base for GST or blipping down because one has reduced tobacco taxes. We try to look through that all the way.
But you know, what we have to do in running monetary policy is look at the situation in Canada as a whole, and we have to look forward. So what we're constantly doing is looking over the next year or two and asking ourselves what the situation will be for the country as a whole over the next year or two. If it turns out that for some reason or other harmonization seems to result in a shift of purchases, we'd have to take that into account. But if it would be temporary and wouldn't last for a very long time, I don't think monetary policy would be in a position to do anything about it.
Mrs. Brushett: The second point is about the bank rate, when you brought in your new policy in February 1996. I apologize if I missed any elaborations you may have brought forward. Would you just elaborate on that for a bit, to see what difference this change has made in the system?
Mr. Thiessen: We do have a little box we put in our Monetary Policy Report on page 14 to try to explain that. But for essentially 16 years the way we set the bank rate was this. We set it at 25 basis points, a quarter of a percentage point, above the rate on the treasury bills the Government of Canada auctions every Tuesday. We did that because 16 years ago we were in the midst of a very severe inflationary period internationally. Interest rates were going up and down with volatility and an amplitude of fluctuation that was extraordinarily wide.
At that time we found it very difficult to decide on what was the right place to set the bank rate for monetary policy in Canada. The way we decided to get around that was to attach the bank rate to a market rate. We would still operate to try to influence short-term interest rates in Canada, but we had to take account of the fact that the international rates were moving a lot.
Now we're in a situation where inflation rates are low around the world, certainly in the industrial world. That means interest rates are also lower, and they are less volatile than they were 16 years ago. In those circumstances it is possible for us to have a fixed bank rate, which we change only when we think it's necessary for us to adjust monetary conditions.
That is really, if I may put it this way, a benefit of this low-inflation, more stable world we live in now. What it provides is a lot more transparency about what monetary policy is up to.
What we found was that it was very difficult for newspapers, television stations, radio stations to know what to make of it. The bank rate goes up 37 basis points. It happened to be because there was a piece of news that came through, say from the United States, the market reacted to it, and our interest rates went up that week. But the fundamental stance of domestic monetary policy in Canada may not have changed at all.
Where we're at now is that when there's a change in the bank rate, it's because we will have changed our operating band for the overnight interest rate. That is the rate monetary policy really has a huge influence over. When we change that, we'll announce a change in bank rate and we'll say why we are doing it.
The Chairman: Mr. Loubier.
.1610
[Translation]
Mr. Loubier: I would like to come back to the index used which, in my opinion, is very important. With an inflation rate of approximately 1.4%, a simple error in the use of the index can make all the difference. Assuming the worst case scenario, a margin of error of 100%, we would have a rate of inflation of 0% and we would be heading directly toward a deflationary situation. A monetary policy based on a poor index overestimates inflation and could contribute to the devastating effects of deflation to which you alluded earlier.
We would thus enter a phase where consumers would feel insecure about their economic future and put their lives on hold because prices would start to plummet year after year. Investors would also be in a holding pattern as a result of the uncertain economic environment they have endured for the past three years. They would be unclear as to their prospects for making a profit, these prospects being less encouraging in a deflationary situation.
It is therefore important for the Bank of Canada to examine this issue quickly. If it turns out that a mistake was made, that the rate was not really 0.5% but 1.5%, and that we are experiencing full deflation, after two years of modest recovery, the deflationary movement could prove catastrophic for the Canadian economy.
Mr. Thiessen: I'm certain that this is not the case. We have looked at this index very closely. According to the results of our research, the maximum margin of error would be one half of one percentage point. If we examined the situation again, we might note another small change. I don't believe that a margin of error of one percentage point is possible. Absolutely not.
Mr. Loubier: Isn't it possible that your current policy, which is nevertheless still quite inflexible, could plunge us headlong into a deflationary movement and a new recession before everyone else?
Mr. Thiessen: No.
Mr. Loubier: Are you certain of that?
Mr. Thiessen: It is difficult to say that we are 100% certain of this, but I don't believe that this is the case. I believe that our monetary policy encourages economic growth and supports the economy.
Mr. Loubier: I will remember that, just as I remembered your comment last year that the Bank's monetary policy should have been a little more flexible. I will remember that the Bank's policy is not contributing to deflation.
We will come back to this during the course of the year. We have to pay close attention to this. A very serious debate is now taking place in Canada on the use of indexes. I think the Bank of Canada would gain some credibility, and we would feel more secure about the future, if the indexes used were a more accurate reflection of reality.
[English]
Mr. Thiessen: Let me say again that we are going to be looking at this question again, but we have looked at it very carefully indeed.
When I gave you the number of 0.5%, that calculation assumes a kind of maximum error in every possible category of error for the consumer price index. So it was the maximum possible error when we looked at it.
We are going to look at it again. I think it's incumbent on us to look at it again, and we will be doing so.
In the meantime, I must tell you that I'm very surprised by some of the estimates coming out of the United States, and I think you'll find that there's a difference of view between some of the commentators and the people who produce the index, who I think believe it is much more accurate than that.
Mr. Solberg: By talking openly about the possibility of deflation, hasn't the bank really increased the probability of deflation by encouraging people to hold off on purchases?
.1615
Mr. Thiessen: I don't think so, based on the fact that I mentioned it the other day as the kind of reason why one should be as equally concerned about the bottom end of the target range as one is about the top end. I must say that most of the commentary that I've heard interpreted it in the way in which I meant it, and that was simply that the bank takes very seriously this target and is going to work as hard to keep inflation inside the bottom end of the range as it works to keep inflation inside the top end of the range. I don't think it is really more than that.
The other point I am really trying to make in all of this is that with a very low inflation rate in Canada, and the outlook for a low inflation rate into the future, what is suggested is that the differential in inflation between Canada and the United States may in fact be widening. The likelihood that this also provides for is a Canadian dollar that, on balance, is going to be stronger rather than weaker. It will provide some upside trend to the Canadian dollar, because exchange rates do reflect inflation rate differentials. In those circumstances, what we think we see are some rather positive market circumstances. Should there be a need for some easing of monetary conditions, we think the market will be quite positive towards that.
So I think it's important for us to get the message out. Canada is a low-inflation-rate country. It's probably a lower-inflation-rate country than you realize, and it probably has an inflation differential below that of the United States that is larger than you realize. That provides a lot of attractiveness to investments in Canadian dollar assets.
The Chairman: Thanks, Mr. Solberg.
Mr. Duhamel.
Mr. Duhamel (St. Boniface): Thank you, Mr. Chairman.
Gentlemen, thank you for your presentation.
I have before me a couple of graphs from the OECD Economic Outlook 1995. Of course, you don't have them, so you're at a disadvantage in terms of looking at them specifically.
Basically, if I've understood this correctly, what this does is try to place Canada's inflation rate, or a measure thereof, as a percentage of GDP in comparison to those of the other G-7 countries, and we come out rather well. It does the same with regard to our gross debt in relation to those of the other countries. We don't come out quite as well there, but it would appear to be that the curve is changing, is coming down a bit.
My questions are: How useful are these particular measures: inflation as a percentage of GDP, debt as a percentage of GDP? How well are we doing in comparison to other G-7 countries?
Mr. Thiessen: Was the first one you were citing inflation or economic growth?
Mr. Duhamel: I'm sorry, it was a -
Mr. Thiessen: You said inflation.
Mr. Duhamel: Did I say inflation? I'm sorry. I meant the deficit as a percentage.
Mr. Thiessen: Okay, so it's the deficit.
There are some complexities in making comparisons, because not everyone keeps their books in exactly the same way, but I believe the OECD works pretty hard to get comparable numbers. They sort of work through our numbers and everybody else's numbers, and they put them all on a basis that is as comparable as you can get. So I think those numbers are indeed pretty good.
You are right. They show Canada as doing rather well in terms of getting the deficit down to some really quite low numbers. But as you also point out, it does remind us that even though the deficit is coming down, we do have a level of outstanding public debt that, as a share of the size of our economy, our GDP, is still pretty high. That's why I and my colleagues at the bank have encouraged governments to stay the course and to try to move that debt-to-GDP ratio onto a downward track. If it stays high, we will be vulnerable to bad news that comes along.
Mr. Duhamel: Perhaps as a supplementary on that same point, Mr. Chairman, people are often asking what is an appropriate level of debt. I suppose an appropriate level is no debt, perhaps, but how realistic is that? What about a deficit? What's a useful measure by which we can know whether we are in serious difficulty or not? Are there better measures than the ones I've mentioned, for example? Are there other useful ones?
.1620
Mr. Thiessen: No, I don't think so. I think those are the relevant measures.
It's very difficult to do some objective economic analysis and say the right number is this. What you know, however, is that the current debt levels that we have relative to gross domestic product... When there were some increases in international interest rates, they had quite an effect here in Canada. That was particularly true in the winter of 1994 and again in the winter of 1995. What that tells you is that there was a lot of concern about our rising debt level.
Now, with the debt level presumably going to come down, I think that eases some of those concerns, but they haven't gone away completely.
One of the measures that tells you they haven't gone away completely is the interest rate differentials between Canada and the United States, particularly for longer terms. For example, if you get out to very long-term government bonds, the interest rate differentials are still running at about 130 or 135 basis points. That's still quite wide.
We have an inflation situation in Canada that is better than the one in the United States. TheU.S. market is very deep and liquid and it's hard to get lower interest rates than the Americans have, but 130 basis points is still high.
Mr. Duhamel: What would be an appropriate number?
Mr. Thiessen: I would like to see it below 100 basis points.
Mr. Duhamel: Some people have told me that when there is significant uncertainty in the economy it leads to additional activity in the savings sector, and that probably limits spending and causes particular difficulties. Is there some sort of equilibrium, balance, here that would be useful? Can you give us some advice on that? How does one judge when those two factors, and others as well, are appropriate, are working together?
Mr. Thiessen: Were you mentioning saving in particular?
Mr. Duhamel: Yes.
Mr. Thiessen: I think what you do is see how the economy as a whole is doing. If you have a lack of saving in your economy, what you'll find is that you're borrowing a lot from abroad. That shows up in a big deficit on your international balance of payments. What you'll find then is that as a consequence of that, your dollar will start to sink, because you have to make more and more debt service payments abroad, and that means you have constantly to export more and more relative to what you import in order to make those payments. That's the kind of indication you have that you're in some difficulty.
When these things are rather more stable - your dollar is rather more stable; you have a balance in your international payments, which doesn't have to be a surplus; it can still be a deficit, but it's not one where the situation seems to be deteriorating, getting worse - I think you can say, yes, all in all things are going pretty well here.
You cannot say for all time that if we just had, let's say, a 0.5% deficit in our balance of international payments, that would be right, because there are going to be some times when you will have a big deficit. If, for example, just to choose at random, there is a huge nickel find in Labrador and all of a sudden you're spending a lot of money on developing that, you're going to have to bring in, probably for a brief period of time, a lot of foreign savings, because there's going to be a lot of capital investment there. So you'll have a period of time when the balance of payments will go into a deficit, but it will be for perfectly legitimate reasons.
Mr. Campbell (St. Paul's): Governor, around this table in this committee room the dreaded ``d'' has referred to deficit or debt. We have a new dreaded ``d'' word that we've been discussing, ``disinflation''.
It reminds me of a comment the minister has made about never speculating about interest rates. You may regret you ever mentioned the word.
Be that as it may, I want to pick up on some of the discussion of disinflation, because I'm a bit confused.
Your report talks about a solid pick-up in growth, which to me would seem to lead to the conclusion opposite from disinflation and lead you then to be concerned about what you've been principally concerned for such a long time now, which is uptick in inflation. I wonder if you could comment on the growth prospects that you foresee.
.1625
Mr. Thiessen: We see some good growth prospects. We talk about a solid pick-up.
To go back to a conversation we were having just a little while ago, there is a margin of unused capacity in this economy. As long as that margin of unused capacity is there and is reasonably wide, that is going to put ongoing downward pressure on the trend of inflation.
So what we really need to see is growth in the economy that is more rapid than usual and that's using up or filling in some of that unused capacity. That will take some of the downward pressure off inflation.
Mr. Campbell: Do we see evidence in this first quarter of that faster growth?
Mr. Thiessen: We do, but it's still quite preliminary. The recent employment numbers are good, but there are still some other areas that are lagging a little bit, and there have been some strike effects and so on. We certainly expect the second quarter to be better and the second half to be better still. As we point out in our report, there may still be some ongoing downward pressure on the inflation rate unless in 1997 we get a much stronger pick-up.
As we point out, one of the real uncertainties in all of this is the issue of consumer confidence. If we get a turnaround in consumer confidence, then I think the concern we've been expressing of inflation getting down to the bottom end of our range is going to evaporate pretty quickly.
Mr. Campbell: I thought I recalled seeing somewhere that consumer confidence has increased sharply, indeed, in the first quarter.
Mr. Thiessen: It has done so in the first quarter from a low level, and it has a way to go.
There are some things that we think are going to operate positively on consumer confidence. The employment numbers are better. That's a very important support to consumer confidence.
The other thing is that we have low interest rates. That means that not only does it cost less to borrow, it also means that if you have a mortgage that you are renewing, you may well be renewing it at a lower interest rate, therefore you have some more disposable income to spend on other things.
Similarly, the decline in interest rates for those people who are in the investing stage of their lives, rather than in the borrowing stage of their lives, will have made some capital gains both on the bond market and on the stock market. All of that helps consumer confidence.
The Chairman: Thank you, Mr. Campbell. Mr. Cullen, please.
Mr. Cullen (Etobicoke North): Thank you, Mr. Chairman.
I wonder if you would comment on the influence that the political uncertainty in Quebec has on your monetary policy and what those trends have been. Are the trends, in terms of their influence, changing or are they static, not in absolute terms but just in terms of their overall influence, assuming there is some?
Mr. Thiessen: As we point out in our report, there has been less concern in financial markets for most of the period since the autumn, and that was undoubtedly a factor leading to some rather positive financial markets.
As we know, markets don't like political uncertainty. When there was some question last Friday and Monday about exactly what the future held, there was some fluctuation in financial markets.
So that concern hasn't gone away. But I must say that most of it has been pretty well reversed as of today.
The Chairman: Thank you, Mr. Cullen. Mr. Bélisle.
[Translation]
Mr. Bélisle (La Prairie): Mr. Thiessen, the fight against inflation and unemployment are often viewed as two opposing issues. In looking at the state of the economy, one often has the impression that the Bank must choose between fighting inflation and a higher level of unemployment.
Does fighting inflation in the short and medium terms through a restrictive monetary policy really have a positive effect on long-term unemployment levels? If it does, is this phenomenon difficult to evaluate or measure? What are your thoughts on this?
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Mr. Thiessen: I think it does have a positive effect because when the rate of inflation is high, we experience a boom and bust situation. During a period of expansion with considerable inflation, we often see some speculation and some debt accumulation. This is not a sustainable situation. After a period of inflationary speculation, a recession occurs. We know for a fact that this will happen and that the unemployment rate will rise considerably. By keeping the rate of inflation low, we can avoid such fluctuations. I truly believe that this is good for the unemployment rate.
A low rate of inflation creates less uncertainty. We can make better economic decisions and this also helps the labour market situation.
I would like to make a third point. As I mentioned earlier, a monetary policy which sets a target range for inflation has an automatic stabilizing effect on the economy. When the pace of economic activity is slow and when there is downward pressure on inflation, we ease up on monetary conditions. When the economy is performing strongly and there is upward pressure on inflation, the Bank of Canada will tighten its monetary conditions, all of which signals a more stable economy and more favourable labour market conditions.
Mr. Bélisle: It is said that the Bank's operations must sometimes focus first and foremost not on fighting inflation but on reassuring nervous or skittish markets. Are you not concerned that your actions might be inopportune and at times make the markets more nervous instead of calming them down, with people believing that the situation must be serious because the Bank is intervening? What do you say to that?
Mr. Thiessen: If confidence in financial markets is lacking, it is almost impossible for interest rates to be low. It's truly impossible. If people are nervous and believe that the situation in Canada is uncertain and if there is a lack of confidence in the Canadian dollar, investors will demand higher interest rates and it will then be virtually impossible for the Bank of Canada to try and bring interest rates down. A high level of confidence must be established at the outset.
Mr. Bélisle: Thank you.
[English]
The Chairman: Mr. Solberg, please.
Mr. Solberg: Thank you, Mr. Chairman.
Over the last 20 or 25 years taxes have gone up dramatically in this country. I wonder if you could comment on what kind of effect that has on consumer confidence, and also what effect tax cuts in Ontario and other provinces will have on consumer confidence.
Mr. Thiessen: Taxes certainly can affect consumer confidence. But so many things are operating at the same time that it's often very difficult to identify all the things that are important. Certainly I would think the things that have been most important recently are the relatively high unemployment rate, until a couple of years ago the relatively slow growth in employment, and some relatively high interest rates.
If you're an individual household, you're concerned about employment, and you're carrying a level of debt that is high and the debt service costs are high, I suspect those are the most important things. That's why the recent growth in employment and the recent declines in interest rates lead us to believe there could be a substantial turnaround in consumer confidence.
.1635
Mr. Solberg: What about the Ontario tax cut? What kind of predictions are you making about that?
Mr. Thiessen: I always feel a little awkward talking about any individual government's specific measures in its budget, whether it's the federal government or that of any single province. I think it's the role of the central bank to point out the financial implications of where the public sector is going in general. It's very uncomfortable for the central bank to be a critic of individual governments and the specific policies they choose, so I like to stay away from that as far as I can.
Mr. Solberg: I'll respect that.
The Chairman: Mr. Pillitteri, please.
Mr. Pillitteri (Niagara Falls): Thank you, Mr. Chairman.
Often we ask a question about the debt and deficit and think it's just one level of government, the federal level of government, determining the debt and deficit.
I want to ask questions about two things. When we're talking about the debt and deficit and the interest rates relating to them, are we talking about only the federal government or about all governments together, including provincial governments in debt?
Since I was in municipal politics, I know there's always a perception out there that the role of the Bank of Canada... Some individuals say, well, if municipalities or regional governments need money, why don't they just borrow it from the Bank of Canada. Would you elaborate? I'm pretty sure I have some in my riding who would like to have that explanation.
Mr. Thiessen: Absolutely. When we talk about debt and deficit at the Bank of Canada, we use all governments. I reiterate the point I was making a moment ago. I think that's an appropriate role for the central bank: to talk about the public sector in general. So those are indeed the kinds of numbers we talk about: total public sector debt to GDP.
About the central bank lending to municipalities, the Bank of Canada has a balance sheet, most of which it now holds in federal government debt: treasury bills and bonds. Were we to hold municipal debt, we'd have to hold less federal debt.
A lot of the suggestions I have seen about the Bank of Canada lending to municipalities really imagine the Bank of Canada printing money to do so, and of course that would be a very bad idea. We have made such huge progress in this country in developing a low-inflation environment, and we're starting to get the pay-off from that. The fact that we have interest rates, almost out to two years, lower in Canada than in the United States reflects this fact, reflects the view that Canada is a low-inflation country. That is the combined effect of the Bank of Canada's monetary policy and the policies of Canadian governments to get their deficits down and the debt-to-GDP ratio falling. We wouldn't want to jeopardize that for a moment.
The Chairman: Mr. Pillitteri, were both your questions answered?
Mr. Pillitteri: Yes, sir.
The Chairman: Ms Chamberlain, please.
Mrs. Chamberlain (Guelph - Wellington): Mr. Thiessen, I want to follow up on my colleague's question about the political uncertainty that has swept over Canada in the last while. I want to follow up on your comments about consumer confidence being good and looking promising for the near future, employment looking good, and I want to know how you feel...that if political uncertainty were to continue in the manner it does...and I know you've already said you don't like to comment particularly province to province, but I think it's important. I will speak for the people in my riding right now. They have felt a lot of frustration, a lot of unhappiness, I would even say they are feeling some shame, that there is a part of the country that wants to leave Canada. They feel it does hurt them in all of these aspects.
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I have people come to me and say they're nervous because they have pensions located in Quebec and they don't know what's going to happen there, or else the head of their corporation is located in Quebec and they don't know whether they should spend their money.
So I'd like it if you could crystal-ball a little bit what it will do for all of Canada, and particularly Quebec, if this sort of process is carried on. Can you give me any feeling on that at all?
Mr. Thiessen: Well, you're right. These kinds of attempts to look into the future to see what might or might not happen are very difficult for me and my colleagues to do, because the things we say do tend to have an influence on financial markets. So it's very important for us, when we look forward, to focus on economic developments as opposed to political developments. We are not experts in political developments, so it's very difficult for us to speculate on what might happen in the future. You people are far more expert on those things than we are.
I would say investors and financial markets generally do not like political uncertainty because they don't know how to cope with it. Many of them are a bit like us. It is their stock in trade to look at economic trends and decide what to make of those. They are not very good at looking at political trends, and therefore political uncertainty tends to cause volatile markets.
Mrs. Chamberlain: Thank you. I appreciate that answer and I certainly concur with it. I think it has hurt us badly. Thank you.
The Chairman: Thanks, Mrs. Chamberlain.
[Translation]
Mr. Loubier.
Mr. Loubier: I would like to respond to what Mrs. Chamberlain said.
It's lucky that we were there, that the debate took place, that we are the only ones in Canada to have a constitutional problem... Don't forget that 75% of the solution to Quebec's constitutional problem rests with Canada.
You are as responsible for the current constitutional situation as the sovereigntists that you are accusing. If some progress had been made in the past 30 years in addressing Quebec's historic demands and needs and if Mr. Chrétien has responded favourably instead of hinting at the possibility of some legal recourse, perhaps we would not find ourselves in the situation that we are in today.
Before accusing the sovereigntists and Quebec of destabilizing anything, take a look in your own backyard. I will say the same thing that I said last year, that is that part of the solution rests with you. You are responsible for a large part of the problem.
That is my final comment.
[English]
Mrs. Chamberlain: Mr. Chairman, I have a problem with this. I'm not here to be interrogated, but if I were, I would like to be able to answer this. We are here to talk to Mr. Thiessen.
[Translation]
Mr. Loubier: You aren't here to accuse anyone either.
[English]
Mrs. Chamberlain: I would appreciate it if the the honourable member -
[Translation]
Mr. Loubier: You are not here to make accusations either.
[English]
Mrs. Chamberlain: - and I say the honourable member - would direct his questions toMr. Thiessen, as I did, for an answer to the question.
[Translation]
Thank you.
Mr. Loubier: I would like the honourable member to stop making unfounded accusations and to stop blaming sovereigntists for all of Canada's economic and social ills. One can only go so far.
[English]
Mrs. Chamberlain: Mr. Chairman, I'm here to represent my constituents' point of view, and they feel there is a lot of instability in this country, as I'm sure many members do across Canada.
Thank you, Mr. Chairman.
[Translation]
Mr. Loubier: Explain the situation to your constituents.
[English]
Explain the situation, the real situation, to your electorate. Part of the problem is your electorate too.
[Translation]
The Chairman: This is an issue that affects us all. I would, however, like to get back to our questions for the Governor.
[English]
Ms Brushett.
Mrs. Brushett: Thank you, Mr. Chairman.
I'm really delighted to have you here, Governor Thiessen, to talk about these issues regarding financial matters.
You have about 100 clients, mainly large financial institutions and the Government of Canada, and your main interest - well, your only interest, basically - is serving your clients, as anyone's interest is. Quite often my electorate comes before me and debates the issue: is the Bank of Canada serving the people of Canada, the grassroots people of Canada? I understand precisely how well off we are in terms of reducing inflation and generating an economic climate with lower interest rates. Indirectly, they certainly benefit more quickly than not, but is there a little bit of a paradox in there that in serving your own clients you may not always do both things at the same time?
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Mr. Thiessen: I must say that my colleagues and I really do regard our objective as serving the best interests of the people of Canada. Our mission is to contribute to the economic and financial well-being of Canadians.
So then the question is how do we best go about doing that? The agreement that we and the Minister of Finance have made is that the best way we can go about doing that is to hold inflation within a relatively narrow band and at a very low level. We have agreed that it is going to provide more stability to our economy and lead to better economic decisions, and that, in turn, will lead to higher standards of living and lower unemployment rates. That's the contribution we believe we can make.
A lot of people believe that if we could just get those interest rates down somehow, we'd fix a lot of problems. I guess the thing we're constantly faced with is explaining that you don't just get those interest rates down.
Yes, we have a lot of influence over the very short-term interest rates, but what we're really trying to do to get interest rates down is to eliminate that concern that so many savers have about inflation.
There's a whole generation of people who put money away in 1972 or 1973 in some kind of fixed-interest instrument and who ended up losing a lot of money on it. We have to persuade those people that we are not going to let that happen again. And that's the way we get low interest rates, and with low interest rates we will get more investment and higher productivity.
Mrs. Brushett: But with all respect, in serving the large financial institutions, which may not be employing as many people as we think they should be today, is your policy not working in that sense?
Mr. Thiessen: Oh, I must say that with respect to monetary policy, I see our clients as being the people of Canada, not the large financial institutions. The large financial institutions are our clients as a banker. You can divide the Bank of Canada's operations into a number of pieces: one is monetary policy, one is the provision of central banking services, and another is the provision of currency. It's in the provision of central banking services that we do indeed have the large financial institutions as clients, but when it comes to monetary policy, no, it's the people of Canada, pure and simple.
Mrs. Brushett: Thanks for that clarification.
The Chairman: Thanks, Mrs. Brushett.
[Translation]
Mr. Pomerleau.
Mr. Pomerleau (Anjou - Rivière-des-Prairies): Thank you, Mr. Thiessen, for your comments. You did not specify, as my colleague requested, the devastating effects of deflation. Could you describe these effects briefly to us?
Mr. Thiessen: I only spoke of a situation where there would be a downward movement on prices in our economy. In such instances, people can wait before making a purchase because prices will fall in the future. Only in such cases would the economy be adversely affected. We're talking about an extreme situation. This doesn't happen when the rate of inflation is around 1%. I'm talking about an extreme case where prices are in a downward spiral.
[English]
Let me just underline this. When I mentioned it - and I probably will regret forever that I've mentioned it - what I was trying to point out is that there are negative effects, just as there are negative effects if you have an upward momentum in the price level. And there are very serious negative effects. The point I was trying to make is that the bank cares about both sides. We're not just hooked on stopping a rising inflation rate; we're also committed to keeping inflation inside that target band.
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In order to underline that, I wanted to remind the journalists that there are some very negative effects if you let that process get away with you. What I didn't emphasize enough is that I was in no way suggesting that we were near that point, but simply that if inflation continues to trend downward, it is going to get close to the bottom of our band, and we are very committed to responding to that.
Mr. Solberg: The provinces either have balanced their budgets or are on their way to balancing their budgets. Obviously that has helped the economic picture for the country. What impact would it have should the federal government ever decide to balance its budget?
Mr. Thiessen: As I was saying to you earlier, what we in the central bank really care about is the total public sector. Having a debt-to-GDP ratio for the total public sector in Canada that is on a downward track I think would be very helpful, because it would eliminate some of the fragility of our situation. What I mean by that is our vulnerability to some bad news that may come along. If all of a sudden you've got an increase in international interest rates or something happens that is difficult for the economy to absorb, we will do that much better if we have a debt-to-GDP ratio that is coming down.
Mr. Solberg: Obviously when you have the situation where debt-to-GDP is going up, that has a negative impact on the interest rates we pay.
Mr. Thiessen: Absolutely.
Mr. Solberg: So when the government runs deficits, everybody pays a real price.
Mr. Thiessen: When you get up to levels of debt that are high and are seen to be rising continuously, you do indeed pay a price.
It doesn't mean that there aren't some relatively low levels of debt where the deficit goes up but no investor is going to worry about that. What I mean by that is that at reasonably low levels of debt you are going to have periods when the economy is weak when you may run a deficit and periods when the economy is strong when you may run a surplus. In those periods when you run a deficit, if your level of debt relative to the size of your economy is not too high, no one is going to worry about that. Everybody is going to think that's perfectly legitimate.
Mr. Solberg: Because of our situation with our extremely high level of debt, would it be fair to say that we're probably in the most perilous situation, with respect to the debt, of any of the industrialized countries?
Mr. Thiessen: I don't know about that. Our situation is starting to look better and better. We've got some European countries who are struggling a bit to meet Maastricht criteria. So, no - certainly not if you include Italy in that. They've got some serious problems.
Mr. Solberg: So we're in the company of Italy.
Mr. Thiessen: I'm not sure how far those simple international comparisons get you. I think that what is by far the most useful is to look at the interest rates here and to say, as long as we have a relatively wide interest rate spread, there's more that we should do.
Mr. Cullen: Governor Thiessen, I have two questions. You might have touched on them in your closing remarks.
The first one relates to what is called the real cost of capital and the spread between nominal rates and inflation. I'm wondering if you could comment on where we're at today, where you see that going, and what impact you think that has on investment and economic growth.
The second question has often been discussed: Canadians owning more of our public debt; in other words, replacing some of the Canadian debt held by offshore holders by debt held by Canadian holders. I'd like you to comment on how realistic or feasible that is. Would it have any impact at all? If this was feasible, would this allow you more freedom to move in terms of the monetary policy in Canada?
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Mr. Thiessen: First of all, with respect to real rates, when you're looking at short-term interest rates you can make a pretty reasonable calculation. You can say, all right, currently short-term interest rates are about 4.75%. Inflation is running at about 1.5%. So you calculate the difference between that and you have about 3.75% or whatever the arithmetic gives you.
When you get out to very long-term rates, it's a rather more difficult calculation to make. If you simply subtract the current inflation rate from the yield on a 30-year bond, that is only a real rate if you are certain that the current inflation rate is going to last for the next 30 years.
What really matters in calculating real interest rates is, what kind of inflation rates are the savers and investors worried about? I think you'll find that while their concerns about the future are looking better, they still aren't there yet. We have some indications of that in our report.
Mr. Jenkins: In the report itself, in terms of expectations of inflation measures, there are several sources. Those coming from the private sector tend to suggest that looking out over the medium term, the expectations for inflation indeed are consistent with the 2% midpoint of our inflation control band. That has converged quite significantly, and therefore there's a sense of acceptance, if you like, on the part of these private sector forecasts of that inflation control target.
There are other measures out there as well. The government issues real return bonds, indexed to the consumer price index. You can do some calculations to extract a measure of inflation expectations. There as well, what you see is a very distinct downward trend toward the inflation control targets themselves.
So from all of those sources you are seeing inflation expectations converging as you look out over the medium term.
Mr. Thiessen: But I think you're still left with a certain amount of concern at the longer end, which is why, if you just simply subtract, say, 1.5% from a long-term bond of 8.25%, you get quite a big difference in there. Some of that is not just a view that inflation is going to be well above 3%. Some of it is just a kind of uncertainty about the future.
We've gone through 20 years of relatively high inflation, a lot of concern about budget deficits and debts. Those haven't gone away. So a lot of savers still feel, well, if I'm going to lock my money up for 30 years, I want quite a high interest rate.
Your other question had to do with Canadians holding more debt. If all one does is have Canadians hold more government debt and somehow less of other things, you haven't gotten yourself very far. All Canadian savings are now invested in something. So if you told, say, all the Canadian pension funds to sell all those Canadian stocks they hold and to buy federal and provincial debt so that there won't be any foreigners holding federal and provincial debt, you won't have gotten yourself anywhere. Somebody has to hold that other stuff.
So in the end, if you really want to reduce the amount of foreign holdings, you have to eliminate the deficit we have been running on the current account of our international balance payments. That in fact has been narrowing a lot recently. There's no question that because of that, foreigners are not accumulating claims on Canada, holdings of Canadian debt, as rapidly as they were before. As we note, that's been one of the reasons for the positive view in Canadian financial markets. You've had this combination of good inflation performance, much improved budgetary situation and the elimination of what was a large deficit on our international balance of payments.
Those things are not all unrelated, either. The fact that governments are borrowing less than they were before means we don't need foreign savings as much as we did before. The fact that our inflation rate is low, which has encouraged our businesses to be more competitive, means that we've exported more. So things are kind of all tied up together.
.1700
The Chair: Thank you, Mr. Cullen.
Mr. Pillitteri, you had one brief question.
Mr. Pillitteri: Thank you, Mr. Chairman.
Some questions have been asked around here, Governor, such as the question of debt, tax cuts and so on. I'd just like to comment on the scenario of how an investor looks at an economy and a nation. That is, when one looks at a nation, does one look at tax cuts or how much actually the deficit is running, or in reality, does one look at the intent to balance the budget two years or three years away? Or does one look at the action of what is going on at the moment?
Mr. Thiessen: Well, one probably looks at all of those things, which is probably not a very satisfactory answer. I think there's no question that if a foreign concern is looking at Canada for investment, it will look at all of those things.
But I think what you're really looking for is a framework of economic policies and whether or not you think there's a framework there that's sound and stable, because if you're investing, you just don't care about how you're going to do next year; you're worried about the year after that and that the year after that and the year after that. Those things are hard to predict if you're just making a simple economic forecast.
So what you want to focus on is: what are the policy foundations like, and are they encouraging or discouraging? There I would say to you that some of the things that have been happening in Canada have been very positive. That includes both our movement to low inflation and the turnaround in the fiscal situation. Both of those provide a kind of economic foundation that makes Canada look much more attractive to foreigners than before.
The Chair: Thank you, Mr. Pillitteri.
Mr. Governor, from your tone today, I assume you're cautiously optimistic about growth prospects for the future, which is good news, because I think members of Parliament from all sides have experienced from their constituents a concern when people say that they really don't feel as if we are out of the recession. We saw very low consumer confidence at Christmas time. We've seen retail bankruptcies continue.
So what you're saying is that it's really going to be a long, slow recovery, but we do see positive signs now, and maybe there is some hope.
Mr. Thiessen: I would certainly like to underline what you've just said, Mr. Chairman. It is true that the economy over the last year has been struggling. You're absolutely right that consumer confidence has not been at all strong. But I think when you look at the underlying situation, as I was just saying, there are such a lot of positives there. Economies don't just suddenly turn around and become wonderfully expansionary, but if you're looking at the underlying fundamentals and they don't look sound, then you have cause for worry.
In addition to the two things I mentioned, look at what's been going on in the Canadian business sector, such as the investment, some of the productivity gains, some of the restructuring, the efforts to become more internationally competitive, and our success on the export side. I think all of those are very positive features. I think we're going to start to benefit from some of those.
The Chairman: We will probably see higher employment rates, because even though we have had some success, the level of unemployment or underemployment is still far too high for anybody to find it acceptable yet.
Mr. Jenkins: The one other thing I would add to that list is the international environment. When you look south of border, the U.S. economy from our perspective is on a very solid growth track, which means expanding markets for Canadians to sell into. That's certainly one of the positive elements also for Canadians.
The Chairman: In terms of enhancing consumer confidence in Canada, do consumers have a high consumer debt load today? What is the level of savings? Are those going to be factors as we look toward a recovery in consumer confidence?
.1705
Mr. Thiessen: You're right Mr. Chairman, there are high consumer debt loads. The level of debt compared to household disposable income is still at sort of record levels.
But there are two things one needs to take into account in assessing it. One is that households also hold a lot more financial assets than they used to. Some of those financial assets, particularly equity holdings, have gone up. Now you're not sure whether the debts and the assets are in the same place. If they're not, the debt levels are still high.
The other thing to focus on is the debt service ratio. With the decline in interest rates, the debt service ratio is way down from the peaks it reached in 1991. So that's one of the reasons why we've been focusing so much on what the recent decline in interest rates should do for consumer confidence over the rest of the year.
The Chairman: I appreciate that very much. Let me just say as we close out that I believe it is very helpful for you to comment publicly on what your role is, be it controlling inflation beyond the 3% level or preventing deflation below the 1% level. I think the more that Canadians understand your role and the importance of it, the better off we are. So I welcome your comments, and I don't think you should feel apologetic for them whatsoever.
Last, let me say this. We are federal members of Parliament, and our single biggest expenditure is the interest on our debt, which is more than $45 billion per year, an enormous amount. Because of that, you are a very important witness before us because you can influence to a certain extent what we do pay to service that debt.
I'm pleased with the trend that I've seen in monetary policy. We all wish things could be done with a touch of a button or by crafting a silver bullet. I think Canadians realize, though, that these magical solutions are just not there and that we're probably going to have to earn our way out of the problems that excesses in the past have created.
I think this is hopeful. I think Canadians are beginning to understand this. They are supporting responsible policies that may not have that quick impact we'd like to see or may not be totally free of cost. Cutting programs is very difficult for a lot of people, both for us as politicians and for the people whose programs are cut.
But I want to say that I think it's been very helpful to us to have you appear before us semi-annually to present us with your report on Canada's monetary policy. This is your third such appearance. It's very useful to us - and through us, we hope, to Canadians. Thank you very much, Governor.
Mr. Thiessen: It's a pleasure, Mr. Chairman. I look forward to being here again in six months' time.
The Chairman: The meeting is adjourned until tomorrow at 3:30 p.m.