(Ottawa) The pandemic has complicated the assessment of labor market conditions and inflationary pressures, creating additional uncertainty as to when inflation will return to its 2.0% target, a deputy governor of the Bank of Canada.
The country has recovered the three million jobs lost at the start of the pandemic, but weaknesses remain in sectors where distancing is difficult, such as retailing, and the long-term unemployment rate is at a high level .
In a speech to the Canadian Association for Business Economics on Tuesday, Deputy Governor Lawrence Schembri explained that there is still some way to go before the labor market reaches its maximum capacity, and that some uncertainties remained.
The Deputy Governor recalled that the central bank’s objective was to support strong growth in employment and output while keeping inflation low, stable and predictable.
However, this goal has become more difficult due to how the pandemic has accelerated changes in the labor market, such as the aging workforce and the digitization of work, Schembri explained.
He further pointed out that the tightening labor market was probably causing more inflationary pressures than initially thought.
“We have a responsibility to address the challenges posed by these uncertainties in the labor market,” he said. Canadians count on us to continue to innovate and strengthen our conduct of monetary policy. And that’s what we do. ”
Inflation still high
The speech provides an additional window into the central bank’s thinking about when it might increase its key interest rate and how quickly it should do so.
Annual inflation hit an 18-year high in September, with the consumer price index rising 4.4% year over year. Prices have risen in part due to disruptions in supply chains, increases in gasoline prices and comparisons to lower prices seen a year ago.
Many of these problems did not go away in October.
Bank of Montreal chief economist Douglas Porter said he expects annual inflation to hit 4.7% in October, which would show the fastest price growth since 1991. Statistics Canada October data will be released on Wednesday morning.
The central bank is mandated to keep inflation as close as possible to the 2.0% midpoint of its target range, but its framework, which guides its work, is due to be renewed by the federal government in the coming weeks. .
New policy directions could include a dual mandate that would focus on both employment levels and inflation. The Conservatives have called on the Liberal government not to increase the central bank’s mandates.
CIBC chief economist Avery Shenfeld wrote in a recent analysis that he expected more specific wording to link keeping inflation on target and full employment.
To achieve full employment, the Bank of Canada may want to slowly raise rates to let the unemployment rate decline, Shenfeld wrote. Deputy Governor Schembri, for his part, indicated during his speech that the achievement of full employment does not necessarily translate into the absence of unemployment, but rather by the closing of the output gap.
The Bank of Canada has indicated that it expects to start raising its key interest rate in the second quarter of 2022. Schembri for his part noted on Tuesday that a hike could take place at any time. between April and September, due to lingering uncertainty about when the economy will be ready to absorb higher rates.
TD Bank economist Sri Thanabalasingam, for his part, said Schembri’s speech supported the bank’s recent comments on the uncertainty of its own outlook, suggesting “a more dynamic central bank” that “s ‘will adapt to the unexpected shocks of his narrative’ on the economy.