Bank of Canada senior deputy governor Carolyn Rogers provided some context to whether policymakers will have to resume rate hikes. Read on.
“We noted that in the United States and Europe, near-term outlooks for growth and inflation are now somewhat higher than we expected in January,” Rogers said. “In particular, labour markets remain tight and core inflation is still high. Since these are our main trading partners, this could point to some further inflationary pressure in Canada.”That inflationary pressure could come from purchasing imports with a weaker currency.
Rogers noted that energy prices are stable, so maybe that would offset any unexpected inflationary pressure. But she also observed that China’s economy is recovering now that authorities have abandoned their zero-COVID-19 policies, and that Russia’s war on Ukraine remains a source of uncertainty. Both could ignite commodity prices at any moment.
“With inflation still well above our target, we’re still more worried about upside risks,” Rogers said.That’s because the most aggressive series of interest rate increases in the central bank’s history last year appeared to have little effect on hiring. The jobless rate is holding near historic lows, complicating the Bank of Canada’s strategy because its models suggest that the jobless rate will have to increase at least somewhat to take the heat off inflation.
For now, the central bank is sticking with logic: the economy stalled in the fourth quarter, so hiring must follow. “The labour market remains very tight,” Rogers said. “With weak economic growth for the next couple of quarters, however, we expect that the tightness in the labour market will ease and, as it does, pressure on wages will come down.
But what if supplies could keep up? One of the reasons they can’t is because Canadian productivity is so weak. In other words, companies have invested too little money and time in innovation and creating the capacity to handle increased demand.
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