Bank of Canada senior deputy governor Carolyn Rogers provided some context to whether policymakers will have to resume rate hikes. Read on.
Rogers indicated the Bank of Canada knows that conditions in the U.S. and Europe could force its hand, but maybe not because of exchange rates. She chose to highlight that Canada’s largest trading partners appear to be growing faster than expected. She also said it was something policymakers debated during the latest deliberations.
“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 perhaps that will offset any unexpected inflationary pressure. But she also said 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.
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.”The Bank of Canada isn’t against anyone getting a raise, but a tight labour market puts upward pressure on wages, and that feeds through to demand.
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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