MNI BOC State: Acknowledging Just 'Some' Wage Improvement

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada delivered the widely expected status quo

on Wednesday by leaving its overnight rate target unchanged at 1.0%, but

acknowledged "some improvement" on the wage front, one of the key data it is

focusing on.

     The central bank did adopt a further wait-and-see stance, with an overall

assessment that was little changed from October, and a normalization process

that will need to carry on based on data and filled with caution in a context of

ongoing uncertainties.

     "Based on the outlook for inflation and the evolution of the risks and

uncertainties identified in October's (Monetary Policy Report), Governing

Council judges that the current stance of monetary policy remains appropriate,"

the BOC said. 

     Even if it expects total inflation to be boosted by temporary factors, it

repeated that "the continued absorption of economic slack" has led underlying

inflation higher.

     The central bank also noted the "very strong" employment growth as well as

"some improvement" on the wage front, which is better than just pointing out the

labor market slack as it did in its October statement.

     In fact, that slack is "diminishing", the BOC said Wednesday.

     It also continues to expect export growth, a key pillar of its economic

scenario, to resume with the support of foreign demand, while noting government

infrastructure spending is becoming "more evident" in data. Meanwhile, business

investment continued to contribute to growth in the third quarter, all

corroborating the central bank's scenario.

     On Tuesday, Statistics Canada reported that Canada's merchandise trade

deficit narrowed to C$1.5 billion in October, benefitting from stronger sales to

the U.S. against the backdrop of a weaker loonie, playing according to the BOC's

playbook.

     All of this in a context of higher oil prices and easier global financial

conditions.

     Yet the central bank continued to stress "considerable uncertainties"

surrounding geopolitical developments and trade policies.

     In addition, its acknowledgement of the labor market progress was rather

limited in light of the pace of jobs gains and the consistent pick up in wages

since April.

     Last Friday, Statistics Canada reported that the nearly 80,000 employment

gain in November marked the 12th consecutive increase, bringing the monthly

average to 31,300, led by full-time jobs, compared with an monthly average of

just 16,600 between January and November 2016, led by part-time.

     The unemployment rate declined 0.4 percentage points on the month to 5.9%

in November, its lowest level since February 2008.

     Even more importantly, the average hourly wage growth for permanent workers

rose 2.7% year-over-year, the largest gain since April 2016.

     Yet, the central bank only saw "some" progress and while the labor market

slack in diminishing, it is doing so "slowly."

     The BOC also remains vigilant as to the impact of higher interest rates on

the economy, notably household spending and housing, meaning it likely still

needs some more time to assess how its cumulative 50 basis point rate hikes in

July and September worked their way through the economy.

     So "while higher interest rates will likely be required over time,

Governing Council will continue to be cautious," it said, signaling the recent

merchandise trade or employment data need more confirming.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$]