MNI: BOC Says Job Market Soft Landing Remains In Play

Bank of Canada Governor Tiff Macklem said Monday the job market can still pull off a soft landing and he's increasingly confident inflation is returning to target, an outlook that earlier this month led him to cut interest rates from the highest since 2001 and say more cuts are possible if the economy progresses as expected. 

"We don’t need a large rise in the unemployment rate to get inflation back to the 2% target," he said in the text of a speech being delivered in Winnipeg, Manitoba. "And with further and sustained easing in underlying inflation in recent months, we are more confident that inflation will continue to move closer to the target." Today's speech didn't give an explicit nod to further rate cuts.

The relationship between job vacancies and the unemployment rate known as the Beveridge curve is returning to where it was before the pandemic when inflation was low and the economy was near full employment, Macklem said. That suggests following the burst of hiring around the end of lock-downs there can be a drop in vacancies and a "relatively small increase" in unemployment, he said. "This is the soft-landing scenario. It has always been a narrow path, and we have yet to fully stick the landing."

Wage growth is similarly providing reason for optimism about slowing trend inflation, he said, pointing to the six-month movement of wage gains moderating to about 4% from a recent peak range of 4.5% to 6%. Policy makers are also paying attention to detailed labor data also pointing to moderating wage pressure. Pay gains adjusted for people moving to higher-paid jobs are running a bit slower than headline wage gains, Macklem said, and weak hiring of young workers and new Canadians also points to slack. "It suggests that the economy now has room to grow without building new inflationary pressures" he said of those slower hiring gains.

Speaking ahead of Tuesday's inflation report Macklem said: "We are not yet back to 2%, and we can’t rule out new bumps along the way. But increasingly, we look to be on our way." The last inflation report showed the headline rate at 2.7%, a three-year low. The Bank in April said inflation will slow to 2.5% in the second half of this year and back to target sometime in 2025. 

While Canada's job growth before and through the pandemic has been faster than the U.S. and Europe, Macklem cautioned that productivity is a major weakness and over time can limit how fast wages can grow without inflation and the economy's trend growth rate.