MNI:BOC Sees Risk Of Over- and Under-Tightening In Hot Job Mkt
Bank of Canada Governor Tiff Macklem said Thursday higher interest rates are needed to slow an overheated job market even as the economy faces a major slowdown, adding there are risks both with going too far and not doing enough to prevent high inflation from becoming entrenched.
"We’re trying to balance the risks of over- and under-tightening monetary policy," Macklem said in a speech in Toronto to the Public Policy Forum. The remarks didn't rehash the view given in the Oct. 26 decision to hike another 50bps to 3.75% that the end of the hiking cycle is near.
The speech focused on a job market Macklem said remains "too tight" even amid recent signs of moderation. Given record job vacancies the central bank has a window to raise rates further without triggering the kind of jump in unemployment seen in past recessions, he said, reiterating the Bank's base case is for growth to stall out over the next few quarters.
The Bank of Canada's mandate is to restore price stability and that is a precondition for seeking sustainable maximum employment, Macklem said. His remarks come in a year where the NDP party propping up Justin Trudeau's Liberal government has called for Macklem to slow rate hikes to avoid a needless recession and a job collapse, and unions questioned an event where Macklem told companies not to plan for sustained large wage increases as inflation is brought under control.
"Good jobs are the best way to reduce inequality and ensure that Canadians have the income they need to meet the needs of their families. But right now, we need the economy to slow down," Macklem said.
The Bank last month said inflation will hold above the 2% target until the end of 2024, and noted a strong job market as evidence of the economy’s resilience. The last job report smashed expectations with 108,300 new positions in October while wage gains were about the fastest since 1997 at 5.6%. Pay hikes still lag inflation that's about 7%. Economists are split on whether Macklem hikes another 50bps in December or steps down further to 25bps following moves of 100bps and 75bps earlier this year.
Macklem faces the biggest test of inflation targeting since it was adopted in the early 1990s. The policy rate began the year at 0.25% and the first move of a quarter point in March lagged a run-up of inflation to around 8%, quadruple the Bank’s target.
Past rate hikes are starting to work and because the full impact takes time to bear out the Bank will be paying close attention to trends across industries that have different sensitivities to higher borrowing costs, Macklem said.
While demand needs to slow, labor supply could pick up in coming years on a rebound in immigration after pandemic shutdowns and a recent roll-out of a national daycare program, Macklem said. That would help counter a drag from the retirement of the Baby Boomer generation, he said. More labor supply still won't be enough to address hot demand that boosts inflation, he said.
"The overriding imperative is to ensure that high inflation does not become entrenched because, if that happens, nothing works well," he said.
"We are resolute in our commitment to return inflation to the 2% target. To get there, we need to rebalance the labour market. This will be a difficult adjustment."