Bank of Canada sees labour-market uncertainty clouding rate path
BNN Bloomberg
A top Bank of Canada official warned the central bank’s ability to gauge when the nation’s economy has reached full employment, and when interest rates need to rise, has become highly uncertain.
A top Bank of Canada official warned the central bank’s ability to gauge when the nation’s economy has reached full employment, and when interest rates need to rise, has become highly uncertain.
Deputy Governor Lawrence Schembri said policy makers are striving to bring the economy to full capacity with employment at its maximum sustainable level. But measuring that level has become more difficult because of structural changes and the uneven effects of the pandemic on the labor market.
“Our assessment of labor market conditions and underlying capacity and inflationary pressures is now more difficult,” Schembri said in prepared remarks to the Canadian Association of Business Economics on Tuesday. “Consequently, more uncertainty exists around the timing of when the output gap will close and inflation will return sustainably to our 2 per cent target.”
Lawrence Schembri speaks during a Bank of Canada video conference in June 2020.
The Canadian dollar was little changed after Schembri’s speech, trading 0.3 per cent lower at $1.2557 per U.S. dollar as of 1:53 p.m. in Toronto. Yields on Canadian two-year bonds were up 3 basis points from Monday’s close to 1.04 per cent.
The speech represents a reminder to markets that the path to normalization remains fundamentally unknown, contingent on the economic trajectory and health of the labor market. Governor Tiff Macklem gave a similar notice to global investors in an opinion piece Monday for the Financial Times, in which he pointed out that while the timing of the next rate hike is “getting closer” it will be dependent on economic outcomes.