End of Year Speech: Tiff Macklem, Governor of the Bank of Canada

December 15, 2021

The Empire Club of Canada Presents

End of Year Speech: Tiff Macklem, Governor of the Bank of Canada

Chairman: Sal Rabbani, First Vice-President, Board of Directors, The Empire Club of Canada

Distinguished Guest Speakers
Tiff Macklem, Governor of the Bank of Canada
Darren Hannah, Vice-President, Finance, Risk, and Prudential Policy, Canadian Bankers Association
Ray Williams, Vice-Chair, National Bank Financial

Introduction
It is a great honour for me to be here at the Empire Club of Canada today, which is arguably the most famous and historically relevant speaker’s podium to have ever existed in Canada. It has offered its podium to such international luminaries as Winston Churchill, Ronald Reagan, Audrey Hepburn, the Dalai Lama, Indira Gandhi, and closer to home, from Pierre Trudeau to Justin Trudeau. Literally generations of our great nation's leaders, alongside with those of the world's top international diplomats, heads of state, and business and thought leaders.

It is a real honour and distinct privilege to be invited to speak to the Empire Club of Canada, which has been welcoming international diplomats, leaders in business, and in science, and in politics. When they stand at that podium, they speak not only to the entire country, but they can speak to the entire world.

Welcome Address by Sal Rabbani, Vice-President, The Empire Club of Canada
Good afternoon fellow directors, past presidents, members, and guests. Welcome to the 118th season of the Empire Club of Canada. My name is My name is Sal Rabbani, and I'm the first Vice-President of the Board of Directors, the Empire Club of Canada, and your host for today's virtual event, the “End of Year Speech from Tiff Macklem, Governor of the Bank of Canada.”

I'd like to begin this afternoon with an acknowledgement that I'm hosting this event within the Traditional and Treaty Lands of the Mississaugas of the Credit, and the homelands of the Anishinaabe, the Haudenosaunee, and the Wyandot Peoples. I want to recognize that this past September across the country, many dedicated time on the first National Day of Truth and Reconciliation to learn more about the experiences of Indigenous children were forced to attend Residential Schools. Many of those individual stories are untold, buried with them in the land, and many survivors who tried to tell those stories were not believed. Going forward, I hope we continue to find ways throughout the year, beyond the National Day for Truth and Reconciliation, to honour these survivors and to hear their stories. As we connect past actions to present realities, listening and learning from each other is ever so important. We encourage everyone tuning in today to learn more about the Traditional Territory in which you work and live.

I now want to take a moment to recognize our sponsors, who generously support the Empire Club, and make these events possible, and complimentary, for our supporters to attend. Thank you to today's lead event sponsors, Canadian Bankers Association, and National Bank of Canada. Thank you, also, to our season sponsors, Canadian Bankers Association, LiUNA place connections of Canada, and Bruce Power.

Now, I'd like to take this opportunity to remind everyone participating today, that this is an interactive event. Those attending live are encouraged to engage, by taking advantage the question box by scrolling down below your on-screen video player. We've allotted some time for audience questions following today's keynote speech. If you require technical assistance, please start a conversation with our team using that chat button on the right-hand side of your screen. We also invite you to share your thoughts on social media, using the hashtags displayed on the screen throughout the event. To those watching on demand later, and to those tuning in on the podcast, welcome.

It is now my pleasure to call this virtual meeting to order. I am honoured to welcome the Governor of the Bank of Canada, Tiff Macklem to the Empire Club of Canada's virtual stage to deliver his end of year speech. It is an Empire Club tradition to host the Governor every few years. As Canada's podium of record, the Empire Club is delighted to invite our supporters from coast-to-coast, across our great country, to join us today. Before we hear from the Governor, I'd like to take this opportunity to invite Darren Hannah, Vice-President ,Finance, Risk, and Prudential Policy for the Canadian Bankers Association, to deliver some opening remarks. Over to you, Darren.

Opening Remarks by Darren Hannah, Vice-President, Finance, Risk, and Prudential Policy for the Canadian Bankers Association
Good afternoon and thank you Sal for your warm welcome. On behalf of the Canadian Bankers Association, our member banks, and the millions of customers they serve every day, thank you, Governor Macklem for joining the Empire Club today, to speak about the Bank of Canada's renewed monetary policy framework. The CBA is proud to be an annual sponsor of this platform, and a lead sponsor of today's event. The pandemic was, and continues to be, a generational event that shocked many parts of the Canadian economy. While there are encouraging signs of recovery with a gradual reopening of businesses, the road to recovery remains at times bumpy and uncertain. To confront the financial dimensions of this crisis, Canada's banking sector worked in lockstep with the Bank of Canada, the federal government and regulators to immediately implement a series of relief measures for households and businesses. Just as this unprecedented level of collaboration and co-ordination helped cushion the pandemic's economic blow, it will also help foster a strong and sustainable recovery. The next steps guiding Canada's economic recovery will be critical. I know that we're all looking forward to hearing Governor Macklem’s perspective on how to continue to renew the strength of our country's economy in 2022, and beyond. Now, I'd like to turn things back over to Sal.

Sal Rabbani
Thank you, Darren, and the Canadian Bankers Association for your support, and welcome remarks today. It is now my pleasure to introduce today's speaker. Tiff Macklem was appointed the Governor of the Bank of Canada in June 2020, for a seven-year term. Mr. Macklem first joined the Bank of Canada in 1984, and held various senior positions. He was appointed as Deputy Governor in 2004, and Senior Deputy Governor in 2010. During the global financial crisis, Mr. Macklem was Associate Deputy Minister at the Department of Finance, and represented Canada at the G7, G 20, and Financial Stability Board. From 2014 until his appointment as Governor, Mr. Macklem was Dean of the Rotman School of Management at the University of Toronto. To those of you participating live today, please submit your questions for the Governor using the Q&A box below the viewer. At the conclusion of the Governor's speech, we'll have a short Q&A session, taking questions from the audience. Governor, again, welcome to the Empire Club. Over to you.

Tiff Macklem, Governor of the Bank of Canada
Well, thank you, Sal, thank you for that very kind introduction. It is always a pleasure to speak to the Empire Club. Last time I was with you, it was March of 2020. I was still the Dean of the Rotman School of Management, and I spoke about the economic impact of COVID-19, when we were just a few weeks into it. What a long journey it has been for everyone. Today, I'm pleased to have the opportunity to talk to you about Canada's monetary policy framework. Every five years the government of Canada, and the Bank of Canada review and renew the monetary policy framework. And two days ago, the Minister of Finance and I announced the renewed agreement. This important framework provides continuity and clarity, and reaffirms our commitment to flexible inflation targeting. Le ciblage flexible de l’inflation nous sert très bien depuis trente ans. Il à garde l’inflation à un niveau bas, stable, et prévisible. Les conditions ont favorisé la stabilité économique pour que les ménages et les entreprises puissent planifier leurs dépenses et leurs investissements avec confiance. Ils ont promis la croissance durable de la production, de l’emploi, et de la productivité. Et en plus d’aider et d’améliorer le niveau de vie des Canadiens.

When we consulted Canadians as part of our review, they told us they value low and stable inflation. And our expert analysis found that it is hard to do better, than flexible inflation targeting. Our framework has also proven to be adaptable and resilient, through economic change and crisis. The COVID-19 pandemic has illustrated the value of a clear and well understood inflation target. Even as the complications of reopening the global economy have caused inflation in Canada, and many other countries to rise, medium- and long-term inflation expectations in Canada have remained well-anchored on our inflation target. Keeping inflation expectations well-anchored is key to completing the recovery, and getting inflation back to target. For all these reasons, the government and the bank agreed to renew the flexible inflation target; the target remains the 2% midpoint, of a 1% to 3% inflation control range. Our renewed agreement also articulates more clearly how we will continue to use the flexibility that is built into our framework. This includes the use of extended monetary policy tools when needed, and the increased emphasis we have been placing on the health of the labour market.

Today I want to briefly review our experience with flexible inflation targeting. I'm then going to turn to the comprehensive review of our framework that we have conducted over the past three years. And importantly, I'm going to focus on our renewed agreement, and what it means as we pull out of this pandemic and prepare for the post-pandemic economy. Monetary policy in Canada has been anchored on an inflation target for 30 years. Despite major external shocks, from the global financial crisis in 2008, to the COVID pandemic, inflation has remained much lower and more stable than it was prior to inflation targeting. In the 15 years before we began inflation targeting in 1991, inflation, as measured by the Consumer Price Index, averaged 7.1%; since then, it has averaged 1.9%. The unemployment rate has also been lower, on average. Low stable inflation has delivered clear benefits for Canadians. It has made it easier for households and businesses to plan for the future, and it has improved the functioning of labour markets. Keeping inflation low and stable has protected low-income Canadians, and those on fixed incomes, from the loss of purchasing power caused by higher inflation. The bank's success in hitting the target on average over time, has built credibility for both the target, and the bank. And inflation expectations that are well-anchored on the target, have been a stabilizing force when the economy has been hit by shocks. Three elements of the framework have been key to its success. First, the target is symmetric, we are equally concerned about inflation that is above or falling below the target. Second, monetary policy is forward-looking; policy actions take time, usually six to eight quarters, to work their way through the economy. That's why our policy decisions are based on where inflation is likely to be in the future, not where it is today. And third, our framework is straightforward to communicate, and it has come to be well understood.

It has also been tested by crisis. The COVID pandemic has been an immense shock to our economy, and our framework has proven resilient. When the pandemic hit, economic activity plummeted, and inflation fell sharply, as many prices were discounted. The combination of exceptionally weak demand, and negative inflation, risked causing deflation, and economic depression. At the outset of this crisis, the framework guided our policy responses, including the use of forward guidance, and quantitative easing. It also guided our decisions to taper, and then end quantitative easing. Our monetary policies were complemented by an exceptional fiscal policy response, and together, they put a floor under the crisis, and supported recovery. Combined with effective vaccines, these policies have worked. Our economic recovery is now well advanced. But as we are all aware, the global economic rebound has generated elevated inflation in Canada, and many countries. To a large extent, this reflects the unique circumstances of the pandemic. With global demand recovering faster than disrupted supply chains can respond, the prices for many goods have increased sharply. While we expect inflation to ease in the second half of 2022, or next year, we are closely watching inflation expectations and wage costs. And we will ensure that the forces pushing up prices do not become embedded in ongoing inflation. Our framework enables us to do just that.

The review of our framework every five years is also a key feature of the Canadian system. The joint nature of the agreement between the Government of Canada and the Bank of Canada, reinforces both the democratic legitimacy of the framework, and our operational independence to pursue the agreed-upon objectives. The framework allows Canadians to hold us accountable. The current review has been our most wide-ranging to date. After 30 years with an inflation target, it was time for a more systematic comparison of a range of alternatives. It was also time to listen to Canadians, from coast-to-coast-to-coast. The review, therefore, encompasses two main elements. We undertook an evaluation of the alternatives to flexible inflation targeting, a horse race between what we have, and what and what others have tried, or we have been urged to try. We also consulted with Canadians to hear about their experiences with inflation in the economy, and to learn about their aspirations for Canada's monetary policy. To do this, we launched an online survey, “Let's Talk Inflation,” and we conducted focus groups, held roundtables, and facilitated online community discussions, to listen to what Canadians had to say about our framework, and the possible alternatives. The response was impressive. More than 8500 Canadians shared their views in our online survey, and hundreds more engaged with us in more in-depth discussions. Their review was also the opportunity to consider how best to respond to two challenges facing monetary policy: low neutral interest rates, and labour market uncertainties.

So, let me say a few words about each of these challenges. The neutral rate of interest, which is the interest rate where monetary policy neither stimulates, nor holds back economic activity, is lower globally than in the past. That means central banks have less room to lower their policy interest rate in response to a big negative shock. COVID-19 brought this challenge into stark relief. The Bank of Canada, like many other central banks, cut its policy rate as low as it could go, to what we call the effective lower bound, or the ELB. And we turned to other policy tools, including forward guidance and quantitative easing. A lower neutral interest rate means we are likely to need to use these tools more often in the future. These alternative tools, they work, but we don't have as much experience using them. The second challenge is that our labour market is undergoing structural adjustment, and the relationship between employment and inflation is not as clear as it once was; my colleague Deputy Governor Larry Schembri spoke about this in November. Shifting demographics, technological change, globalization, and the changing nature of work have made it harder to gauge when the economy has achieved the maximum sustainable level of employment. And the short-run relationship between output and inflation, or what economists call the Phillips curve, appears weaker than in the past. Again, COVID has only reinforced this challenge accelerating structural change and affecting workers very unevenly.

So, what did we learn? With our horse race, we set out to compare flexible inflation targeting, with alternatives, average inflation targeting, or AIT, a dual mandate that targets both inflation and employment, nominal gross domestic product targeting, and price level targeting. In our modeling and simulations, three frameworks, flexible inflation targeting, AIT, and a dual mandate, had broadly similar overall performance, and were superior to the other alternatives. The benefits of AIT were concentrated when inflation was below the target, and the policy rate was at the ELB. But when inflation was above target, AIT tended to lead to increased volatility in employment and output. In our economic models, the dual mandate performed similarly to flexible inflation targeting, but it affected employment only very modestly, despite prioritizing it. This is because employment already plays a central role in the flexible inflation targeting framework. For inflation to reach its target sustainably, the economy has to reach full employment; the two go hand in hand.

Our public consultations complemented the expert analysis, and the results highlighted both the diversity of Canadians experiences, and some common themes. When asked about the alternative monetary policy frameworks, the people we engaged with gave the most support to flexible inflation targeting, AIT, and a dual mandate. And overall, flexible inflation targeting was the preferred framework. The overriding message that came through from the consultations, is that Canadians value low and stable inflation. Inflation is difficult for many. When the cost of living goes up, they have trouble stretching to cover all their expenses. Canadians are also concerned about the unequal impacts of inflation, and economic cycles. It is striking to me that the results of our historical experience, modeling, simulations, and public consultations, are all in broad agreement. What comes through clearly, is that flexible inflation targeting is hard to beat, in theory and in practice. Its 30-year record of success has demonstrated that it is built for all seasons. It has survived the test of large global crises, and it's done well in ordinary times. But some of the insights of AIT and a dual mandate could help us address two important challenges facing monetary policy.

So, what did we agree? The new agreement on our monetary policy framework secures the continued benefits of flexible inflation targeting, and it provides increased clarity on how we will implement the framework to control inflation, and help the economy reach its full potential. The Government of Canada, and the Bank of Canada, agreed that the best contribution of monetary policy to the well-being of Canadians is to continue to focus on price stability. The government and the bank also agreed that monetary policy should continue to support maximum sustainable employment. We recognize that maximum sustainable employment is not directly measurable and is determined largely by nonmonetary factors that can change through time. Further, the government and the bank agreed, that because well-anchored inflation expectations are critical to achieving both price stability and maximum sustainable employment, the primary objective of monetary policy is to maintain low and stable inflation over time. Les attentes d’inflation doivent être bien ancrées pour atteindre la stabilité des prix et le niveau d’emploi durable maximal. C’est pourquoi le Gouvernant et la Banque ont convenu que l’objectif principal de la politique monétaire est de maintenir l’inflation à un niveau bas et stable. La cible d’inflation reste à deux pourcents. C’est le point médian d’une fourchette de maîtrise de l’inflation d’un à trois pourcents. On va garder les avantages d’une cible claire, réaliste, bien compris et bien crédible. L’entente dit aussi comment on va continuer d'utiliser la flexibilité du cadre.

The agreement notes that our extended monetary policy tools can help address, lower neutral interest rates. It notes that in the right circumstances, actively seeking maximum sustainable employment can help us address the inherent uncertainty about the level of employment that is consistent with price stability. And we will continue to consider a broad range of job market indicators, to gauge the health of the labour market. This framework is what we need, to complete the recovery from the pandemic. Having ended quantitative easing, we are now focused on our forward guidance, and we are focused on assessing the diminishing degree of slack in the economy, and on bringing inflation sustainably back to target. This framework is also what we need post-pandemic. While we all hope that we never again see a recession as sharp as the one caused by COVID-19, it won't be the last recession we face. We need to ensure that monetary policy has the ability to provide stimulus when needed, in a world of low neutral interest rates. And even as the economy normalizes, uncertainty about maximum sustainable employment is not going to go away. So, in my remaining time today, let me expand on how our extended monetary policy tools and the intention we are giving to labour markets.

With low global interest rates, the bank is likely to lower its policy rate to the effective lower bound, or the ELB, more often, in response to shocks. And what that means, is that we may need to use forward guidance and our balance sheet more often than we have in the past. We know that the rates that matter most for consumers and businesses are medium-term rates, for mortgages, lines of credit, and business loans; forward guidance and quantitative easing can help us push these rates down. In certain circumstances, to support employment and return inflation to target, we can leverage the flexibility that already exists in our framework, to make monetary policy more effective at the ELB. And one of the best ways to do that, is to use exceptional forward guidance. This involves committing to holding rates lower, for longer, to instill greater confidence in the economic recovery. This can be done on its own, or in combination with quantitative easing. This will help us avoid prolonged periods of below-target inflation, and high unemployment. An implication of exceptional forward guidance is that inflation will likely go a little above the target after we exit from the ELB, before inflation comes back to the target over the medium term. When we use forward guidance in this way, we will communicate this inflation dynamic clearly.

When we consulted with Canadians, they told us that they want employment to play a central role in our monetary policy framework. And our simulations illustrated the important role that maximum sustainable employment plays, in successfully hitting the inflation target, and helping stabilize the economy. As I've already outlined, price stability and maximum sustainable employment go hand in hand, achieving maximum sustainable employment is central to keeping inflation on target. In addition, there is now greater recognition backed by economic research, that when the benefits of economic growth and opportunity are more evenly shared, prosperity improves for everyone. Few things are more central to the prosperity of Canadians, than having a good job, but maximum sustainable employment is not directly observable, so we have to work to find it, as well as to achieve it. To do this, we are undertaking a broader and deeper assessment of the health of the labour market. We are looking beyond headline employment numbers, to gauge the inclusiveness of the recovery, and its job characteristics. Our new dashboard of labour market indicators compares the health of the labour market today, with the situation just before the pandemic. We have some further work to do, to use this broader set of indicators, to assess where maximum sustainable employment is going forward. And you can expect to see more discussion from us, linking our analysis of the labour market, to our monetary policy decisions. The agreement also notes that when conditions warrant, the bank may use the flexibility of the 1% to 3% control range, to actively seek the maximum level of sustainable employment.

So, when might conditions warrant? Well, when inflation is close to target, interest rates are at more normal levels. And we're not sure if we've really reached the maximum sustainable employment. That's not the current situation of course. Inflation is now already considerably above our target, and our policy interest rate is very low. But as we move beyond this pandemic, and the economy normalizes, uncertainty about maximum sustainable employment will persist. When conditions warrant, we can probe by being more patient, to help us better gauge the level of employment that is consistent with price stability. This is not a new idea. In the two years before the pandemic, unemployment in Canada was around 40-year lows. Based on past cycles, we would have expected inflationary pressure to begin to increase, but inflation was not rising above the target. By being patient, the bank learned that the level of employment that is consistent with price stability, was higher than most previous estimates. Le ciblage flexible de l’inflation nous permis de rechercher le niveau d’emploi durable maximal quand les bonnes conditions sont présentes. Notre approche va être transparent. On va expliquer quand on recherche ce niveau. Est-ce que les indicateurs du marché du travail et de l’inflation nous disent?

This brings me to the final, and very important point. We know that monetary policy works better when people understand it. This starts with a clear mandate, and it is enhanced by transparency. The move towards increased transparency by central banks over the past 30 years has increased the credibility, and effectiveness, of monetary policy. By explaining how our decisions link to our mandate, and by delivering low inflation for 30 years, our monetary policy framework has earned the trust of Canadians. To keep that trust, we will be clear about how we are implementing flexible inflation targeting, because monetary policy needs to be forward-looking. Our decisions, and our communication, are anchored by our inflation forecast, our interpretation of incoming data, and our assessments of the risks. This will include how a broader set of labour market indicators are affecting our estimates of potential output, and our assessment of inflationary pressures. We will continue to use the flexibility built into our framework, when that flexibility will help us better manage risks, and achieve our mandate. And when we use that flexibility, we will be clear about why and how we are using it. You will see it in our inflation forecast, and we will discuss it relative to incoming data, and our assessment of the risks.

It's time to conclude. Our monetary policy framework has delivered prosperity for Canadians, by keeping inflation very close to 2%, on average, for 30 years. Flexible inflation targeting is well understood, and broadly supported by Canadians, and the credibility of the target helps to stabilize both inflation and output. This agreement reaffirms our commitment to price stability and the 2% target. This is the framework we need now as we face elevated inflation and the challenge of reopening the economy. Notre cadre de politique monétaire a assuré la prospérité des Canadiens en gardant l’inflation moyenne très près de deux pourcents pendant trente ans. Le ciblage flexible de l’inflation est bien compris et appuyé par les Canadiens. La crédibilité de la cible aide à stabiliser l’inflation et la production. L’entente réaffirme notre engagement pour la stabilité des prix et la cible de deux pourcents. C’est le cadre qu’il nous faut maintenant pour faire face à l’inflation élevée et aux défis de la réouverture de l’économie.

Looking beyond the pandemic, the renewed agreement also articulates clearly, how we will continue using the flexibility in our framework, to address future challenges confronting our economy. It explains how we will use our extended set of monetary policy tools when needed. And it outlines how we have begun to use a broader range of labour market indicators to assess full employment, and the economy's potential output. This will help us achieve our inflation target. This agreement provides continuity and clarity, and it strengthens our framework to manage the realities of the world we live in. And it is what we need today, and tomorrow, to foster continued prosperity for Canadians. Thank you. And I'd now be very pleased to take your questions.

QUESTION & ANSWER

Sal Rabbani
Thank you, Governor for that update. We now will have some time to take a few questions from the audience; I've got one right here. Governor, today you shared with us the Bank of Canada's renewed monetary policy framework, and the principles that will guide the bank over the next five years. One of the questions here from the audience is, what is different than before; and how is this different from a dual mandate?

Tiff Macklem
Well, my message really is continuity and clarity. Our mandate remains price stability, our target continues to be 2% inflation. What this agreement does do, is it provides clarity, and it really reaffirms what we're already doing. It is clear that the Bank of Canada has a role to play in supporting employment, it's also clear that, because well-anchored inflation expectations are critical to achieving both price stability and maximum sustainable employment, the primary objective of monetary policy remains price stability. So, it's not a dual mandate; a primary objective remains price stability.

Sal Rabbani
What can you, what are you going to see going forward?

Tiff Macklem
What you're going to see going forward, is that the inflation target remains our beacon. When we need to use our extended monetary policy tools, we are going to continue to do so. And we are going to use a broader range of labour market indicators to assess where full employment is, to help us achieve the inflation target. So, really the message is, you're going to continue to see more of what you've seen.

Sal Rabbani
Thank you, Governor. And the next question is a hot-off-the-press question. Earlier this morning, StatsCan provided the latest inflation number, indicating that the annual pace of inflation held steady in November, because the CPI rose 4.7% compared with a year ago. What's your reaction, and what does it mean for Canadians? Are you surprised with the number?

Tiff Macklem
As you indicated, inflation for November, Statscan published inflation for November; it came out at 4.7%. That's the same as what it was in October, and it was largely as expected. We, inflation is running well above our target, and what we've indicated, is that we expect it to remain elevated, really through the first half of next year, before it eases back towards our 2% target in the second half of next year. What I would stress, is that this mandate reaffirms our commitment to getting inflation back to target, we are very focused on getting inflation sustainably back to target. We are watching measures of expected inflation and wage costs very closely. Keeping inflation expectations well-anchored is key to getting inflation back to target. I do want to assure Canadians that, you know, we have the mandate, we have the tools, and we have the commitment to bring inflation back to target, and in fact, this mandate requires us to do that.

Sal Rabbani
Thank you, Governor. We’ve got another interesting question here, and one that's top of mind for many leaders today. And there’s this concept of, you know, your thoughts on this notion of an inclusive recovery. What does it mean for you; and what's the role of the Bank of Canada here?

Tiff Macklem
Well Sal, let me begin by just underlining that monetary policy is a broad macro instrument, and we don't have the mandate, or the tools, to support specific groups in society. But as a broad macro instrument, monetary policy does have a role to play in supporting inclusion and equality, and it really starts with price stability. We know that inflation impacts low-income people, and people on fixed incomes, particularly acutely. It's a tax on holding cash, and they if you've got a fixed income, or low income, cash is a bigger part of your life, so it is affecting you more; by keeping inflation low, we're reducing that. The other thing that we've seen, really over the last 30 years, is that well-anchored inflation expectations helped stabilize the economic cycle, so it reduces the seriousness of downturns. We also know, and we've seen this very starkly through this crisis, that downturns particularly affect the most vulnerable members of our society. So, by stabilizing the economic cycle, or reducing the severity of those downturns, monetary policy is helping to support, or reduce the amount of inequality in society. The other thing I would underline, is that labour markets work better when inflation is low and stable. I grew up in the 1970’s, and the 1970’s were a period of a lot of labour market strife; there were a lot of strikes, there was rising unemployment, it was a difficult time for workers. By keeping inflation low and stable, monetary policy helps labour markets work better. And then the final thing I'd mentioned is, particularly within the last 10 years, there has been greater recognition that more inclusive growth, and growth that is more evenly shared across society, is good for everyone, including more people in the labour force; that creates a bigger economy, that helps everybody. And this mandate, I think, by clarifying our role in supporting employment, is helpful in that regard. By supporting a complete recovery, we can support more inclusive growth. So, that was a long answer—it was an important question—but you know, to boil it down, price stability and full employment, they together create a more inclusive economy?

Sal Rabbani
Governor I've got another question here, and it's, how concerned are you about the criticism directed at the bank, that alleges it is contributing to inflation by financing government debt, or as some say, by printing money. Offering comment?

Tiff Macklem
Well, let me be very clear on two things. First of all, our quantitative easing program, which does involve buying large quantities of government debt. The decisions we took to engage in quantitative easing were guided by our inflation target; that has been our beacon throughout. At the start of this crisis, the economy was in deflation, the risk was a Great Depression. We came in very boldly, we lowered our policy rate to zero, we utilized exceptional forward guidance, and we reinforced that with quantitative easing, and that lowered the interest rates further out the yield curve, the interest rates that really matter to households and businesses, mortgage rates, business lending rates, that helped stimulate demand that has supported this recovery. And together with exceptional fiscal stimulus, and of course, very effective vaccines, it's worked. Our recovery is now very well advanced. Our framework also guided our decisions to taper QE, and in November, we ended QE. QE does not, is not financing the government; it lowers the cost of finance for the government, in the same way lowering interest rates lowers the cost of finance to the government, and in doing so, it lowers the interest rates that matter for households and businesses, and it has been effective in that regard. The second point is, yes, inflation is elevated, it is well above our target, and we are not comfortable with this where we are. But I do want to underline is, this is a global phenomenon. We've seen, with the reopening the global economy, there has been a big increase in the global demand for goods. At the same time, the global supply chains are, they're impaired, they're gummed up, and their ability to respond to this increased demand has been impaired, and so, you're seeing sharp rises in the prices of globally traded goods. Our job—and we understand our job very clearly, and this mandate only reinforces it—is to make sure that those increases in the prices of globally traded goods do not become embedded in ongoing inflation. And this mandate gives us everything we need to do that.

Sal Rabbani
Thank you, Governor. I've got one more question here from Mabel, and that is, how is maximum employment measure? People collecting EI, or the number of people that could be employed?

Tiff Macklem
Well, the first thing to stress, is that maximum sustainable employment, what it is, is it’s the level of employment that is consistent with price stability. So, in other words, it's the highest level of employment you could sustain, without having inflationary pressures to building the economy. So, it's not something that is directly observable. To try to figure out where it is, we are using a broad range of labour market indicators. That includes things like the unemployment rate, the employment rate; but it also includes things that look at the inclusiveness of the labour market, how evenly shared is the recovery? And it also includes things related to job characteristics. What are wage rates doing? Are wage rates relatively stable? Are they moving up sharply? What are hours worked doing? If hours worked go up a lot, that suggests employers will be hiring more in the future. So, by looking at this broad range of indicators, we can better gauge where it is. The other thing, of course, we look at is inflation indicators. If, I mean, this is not the situation we're in now, but you know, if you go back to where we were, say just before the pandemic, unemployment was around 40-year lows, inflation was relatively stable, our interest rates were at more normal levels. What's interesting is, that period, we didn't see inflation rising, and we learned something from that; we learned that the maximum sustainable level of employment was probably a little higher than most previous estimates suggest. So, the short answer is, there are important judgments to be taken, and there's a lot of information we can use to inform on those judgments.

Sal Rabbani
Thank you, Governor. I'm afraid that's all the time we have for questions, but I'd like to thank everyone who submitted their questions. And thank you, Governor, for your candid and insightful responses.

Tiff Macklem
Let me just thank you, and let me wish everybody the very best over the holidays. It was a real pleasure to join you today.

Sal Rabbani
Thanks.

Tiff Macklem
Thank you.

Sal Rabbani
I'd now like to take the opportunity to welcome Ray Williams, Vice-Chair of National Bank Financial, to provide today's appreciation remarks. Welcome, Ray.

Note of Appreciation by Ray Williams, Vice-Chair, National Bank Financial
Thank you so much, Sal. I hope everyone can hear me well. Thank you, Governor. I want to thank everyone today for attending this particular session; we certainly hope that you found it insightful, especially in light of the high volatility, and rapidly changing market environment we’ve experienced of late. Of course, the conversations have been numerous, based on the anticipation of, I guess, the rate hikes that everyone has been talking about, that we anticipate in New Year. Lots of conversations in that regard, especially as you sit in the trading room, hearing your traders looking to manage their positions. Understandably so, with equity markets; I would say, fairly lofty valuations at this point We still see rates at historic lows, solid employment gains, as you've referenced, as the economy bounces back from the situation that we've all experienced over the last 18 months. Notwithstanding, I would say the supply disruptions that you've mentioned, in the supply chain, certainly helps, or creates a more uncertain future. Then on top of that, of course, inflation mentioned this morning of 4.7, 2-decade highs. And I think everyone is hopeful that per your view of the world, that in the second half of next year, we see that come down somewhat. But it certainly provides for growing anxiety overall within the marketplace. And so, it makes this particular conversation, and your speech today, even more appropriate. So, let me extend thanks to you, Governor, Tiff Macklem, for being with us today to share your views, the Empire Club of Canada for hosting this particular event, and all those in attendance today. And with that, I would just like to say on behalf of National Bank of Canada, I wish you all the very best for the upcoming holiday season. Thank you very much.

Concluding Remarks by Sal Rabbani
Thanks Ray, and thanks again to the National Bank of Canada for it’s support, and to Governor Macklem, and everyone joining us today, or participating later on demand. Our next event on January 13th, will be our very popular “Annual Investment Outlook” panel discussion. More details, and complimentary registration are available at empireclubofcanada.com. This meeting is now adjourned. Take care, happy holidays, and stay safe.