The Governor of the Bank of Canada warns that interest rate hikes are coming, but that companies will also have to increase their productivity to help limit long-term price increases.
In the text of a speech for a virtual event of the Canadian Chamber of Commerce, Tiff Macklem asserted that companies would have an important role to play by increasing their investments in the productivity of workers, in order to create non-inflationary growth. “Increasing productivity is an essential condition for the non-inflationary expansion of the economy and the improvement of the standard of living. At a time when inflation is already well above target, this growth is more essential than ever. »
According to him, boosting labor productivity, which measures output within a specific range, is necessary so that wage growth is not accompanied by increases in unit labor costs. “The higher the productivity, the more companies can pay high wages,” he said.
Canadian business investment has long lagged that of US business, including in sectors such as information and communications technology, which play an important role in productivity growth.
There are, however, some signs pointing to an increase in spending. The central bank’s latest business outlook survey shows 62% expect to spend more on machinery and equipment in the coming year than last year, the highest proportion to this since the Bank began conducting this survey in 1999.
Imperative adaptation
Indications are that business investment will grow faster in Canada than in the United States — provided businesses go ahead with that spending, Macklem said. “It is imperative that Canadian companies materialize their investment projects, otherwise they risk losing ground to their American competitors. »
Companies will also have to adapt to the new flexibility of work arrangements, now that the pandemic has changed the relationship to telework, which will allow them to expand their pool of potential workers. For their part, workers will have to be willing to improve their skills.
The central bank signaled on January 26 that interest rate hikes were to be expected to mitigate high inflation, which is currently hovering around 5%. The next decision on its policy rate is scheduled for March 2.
Macklem pointed out that the Bank had “couldn’t be more clearly” signaling an upward trajectory for interest rates. “We also agreed on the importance of keeping inflation expectations well anchored. Indeed, if they were to unanchor, the price to pay to bring inflation back to the inflation target would be much higher. »