Bank of Canada Governor Mark Carney visited The Globe and Mail editorial board on Thursday. Here are some excerpts from the discussion, which touched on the Canadian economy, the census, currency appreciation and the new Basel III capital requirements:
On under-investment by Canadian businesses:
Investment in Canada has tracked significantly below investment in prior recessions and prior recoveries … despite the fact that financial conditions have been much easier throughout this recession and in this recovery; that the financial system is working, is willing to lend (lenders and capital markets are looking for borrowers, and the balance sheets are in much better shape than previously).
On top of that, there are a couple of very clear reasons to invest – underweight in emerging markets, and a fairly yawning and well-documented productivity gap which extends across virtually every industry.
So we see the need for investment and restructuring across a large part of the Canadian economy. We understand the concern about the outlook for the United States … but the other factors, both on the supply side for investment, the financing side for investment, and the reasons for investment in our view are quite clear.
And we’re seeing the best Canadian corporates are starting to respond, and we expect that others will as well.
On changes to the long-form census:
The proposed adjustments in the long-form census could have implications for some of the data that we use. We’re going to work through with StatsCan to understand them, so that Canadians can be assured that we’re using reliable data to fulfill our important responsibilities.
Which census data could be affected?
A series of surveys on the household side, the potential implications for the Labour Force Survey, it’s not absolutely clear. [There] could be issues around the productivity data, some of the national accounts, then you get into more granular data … some of our longer-term research that could be affected by that. The honest answer is, we don’t fully know … We can conceptually sketch it out, but we’ll really start to know once the information is in. But it’s, you know, non-trivial.
…
We need to work through and understand the implications of the change, and we’ll do that in a very deliberate way. That there’s a non-trivial range of data that could be affected. It’s an analytic question, it’s data, it’s a substantive question in the end. I don’t want to speculate on the net impact ex ante. We’ll take the change, work with [Statistics Canada], figure out where we need to supplement the data, and do our best to do that within the constraints of our budget.
On currency flexibility:
Enhanced currency flexibility is not a slogan, it is a reality. For sustainable rebalancing, we will have to see greater flexibility in all major currencies, including the [Chinese] renminbi, which we have not yet seen.
Does the yen move [Japan sold hundreds of billions of yen on Wednesday, pushing the currency lower in an effort to boost exports] make it easier or more urgent or raise the possibility that the Bank of Canada might think about intervening to ensure the strong loonie doesn’t exacerbate the slowdown in sales to the U.S. that Canadian manufacturers are starting to see?
We look at the exchange rate in the context of achieving our inflation target. Our intervention policy, which is shared with the government, a joint decision – there are two possible scenarios in which we would intervene. The first is a breakdown in the functioning of the market: a rare occurrence. The second is if persistent strength of the currency relative to fundamentals threatened the economic outlook here in Canada. What’s happened in Japan doesn’t change the policy.
On whether the capital requirements agreed to in the Basel III regime are sufficient:
How do we make the [2.5 to 5 per cent] buffer more efficient? (Because, our view was that banks should not carry this at all points in time) … One, having a counter-cyclical element, the other 2.5 per cent – so that only you had these run-ups in excess credit growth, which shouldn’t happen that often, only then do you start to build that buffer up, and then you could draw the whole thing back down. And secondly, by having contingent elements to non-equity Tier I and Tier II capital. So it’s a way to make the capital structure much more efficient.
Martin Wolf [a Financial Times columnist who wrote that minimum capital ratios should have been around 20 per cent] is only looking at a subset, he’s not looking at the totality of the capital structure, and he’s also, I would suggest, not fully thinking about the efficiency of the system. But it does mean we need to make the counter-cyclical operational, it does mean that we need to make contingent capital operational, or some broader bail-in approach. Either would work. We will think hard whether that should be done on a statutory basis, through resolution mechanisms, or on an actual instrument basis, on senior and Tier I and Tier II capital. And we’ll do it in a very deliberate fashion. But it is a very high priority.
