MNI: BOC Sees Major Labor Slack And Calls Inflation Transitory

Bank of Canada Deputy Governor Larry Schembri said Tuesday there is still a lot of job market slack and called recent elevated price gains transitory, saying the pandemic makes it tougher for policy makers to figure out relationships between the economy's full potential and inflation.

"The labour market has recovered the pandemic-induced job losses, but considerable excess capacity remains," Schembri said. "We still see areas of slack, notably the high share of long-term unemployed and the elevated unemployment rates of older workers. Wage growth also continues to lag."

"With these uncertainties, it's harder to know when the economy has reached maximum employment and the output gap has been closed. It is also more difficult to gauge underlying inflationary pressure when the Phillips curve relationship is uncertain," he said.

"Inflation has risen above our 1% to 3% inflation control range in recent months, caused by the transitory effects of rising energy prices and global supply constraints. Medium-term inflation expectations, however, have remained relatively well anchored due to our past success in achieving the inflation objective," he said.

Schembri didn't reiterate the BOC's decision last month to advance forward guidance on favorable conditions for hiking the record low 0.25% policy interest rate to as early as April from the second half of next year. Some investors are betting on an increase even sooner, a view fed on Monday by Governor Tiff Macklem's article in the Financial Times saying "we are getting closer" to a rate increase and "if we end up being wrong about the persistence of inflationary pressures and how much slack remains in the economy, we will adjust."

The pandemic took a bigger toll on groups such as lower-paid employees, and like other recessions workers could end up losing long-term skills, Schembri said. Technological advances made before the pandemic and labor supply swung by immigration and an aging population with more retirements are also shifting the goalposts around a complete job rebound, he said.

"This poses an important challenge to monetary policy," he in prepared remarks to the Canadian Association for Business Economics. "More uncertainty exists around the timing of when the output gap will close and inflation will return sustainably to our 2 percent target," he said, the BOC's two conditions underpinning its rate-hike guidance.

Canada reports October inflation Wednesday that's expected to accelerate to 4.7% from September's 4.4%, already the fastest since 2003. Any further uptick would make it the quickest pace since 1991, when the central bank first adopted inflation targeting in a move that slowed inflation from well over 5% to about 1% by the middle of 1992.