MNI BOC State of Play: Still Need Many Pieces, Notably Wages

By Yali N'Diaye

     OTTAWA (MNI) - Notwithstanding higher oil prices and the latest evidence of

a wage growth pickup, Bank of Canada Governor Stephen Poloz is remaining on the

cautious track, waiting for "a lot of pieces" to fall into place before he can

be convinced the Canadian economy is back to running at full capacity with

inflation at the 2% target.

     The BOC chief is only taking little comfort from the latest string of

inflation and wage data, albeit recognizing the pickup.

     Average hourly wage growth for permanent workers picked up speed to reach

2.4% in October, the fastest increase since April 2016, maintaining a six-month

upward trend since reaching a dip last April.

     But Poloz stressed Tuesday that, "even though Canada's unemployment rate

has returned to its 2007 lows, suggesting the labor market is at full

employment, other indicators suggest that a fair amount of slack remains." So he

preferred to underline the "low" trend line for wage growth, adding that despite

the latest improvement reflected in wage data, "you never know if it's the

beginning of an uptrend." More data points will be needed for the BOC to make

its mind, suggesting more wait.

     On the inflation front, the three core measures of underlying inflation

have been picking up, with the range now at 1.5% to 1.8%, with the bottom end

consistently ticking up since reaching 1.2% in May and June, when the top of the

range was 1.5%.

     Still, the range has been below the 2% target since November 2016, with

total inflation consistently below 2% since last March. Poloz mostly explained

this softness "by the drag related to the surprising persistence of excess

capacity in the economy, and the fact that inflation reacts to excess demand

after a lag."

     "This drag can persist until all slack in the labor market is absorbed," he

said. 

     He also indicated in his comments Tuesday that the BOC is likely looking

through the recent spike in oil prices, since the impact of short-term oil price

moves eventually falls out of inflation after twelve months.

     Besides, Poloz also stressed the flexibility of the oil market that he

deemed underestimated, citing a more elastic supply curve, especially the

ability of U.S. suppliers to respond quickly.

     So he reaffirmed the "cautious" approach the BOC is currently adopting,

while assessing the sensitivity of the economy to higher interest rates in light

of elevated household debt.

     Perhaps Wednesday's data gave support to the central banker's cautiousness

when it comes to the latter point.

     Canada Mortgage and Housing Corporation reported that housing starts rose

to a higher-than-expected seasonally adjusted annual rate of 222,771 in October

from 219,293 in September, which was revised up from 217,118.

     The gain was especially surprising given that residential building permits

have been going down for three consecutive months between July and September, as

Statistics Canada reported Wednesday. 

     Still, overall data are pointing to a third quarter growth slowdown, as

projected by the BOC, which likely has its eyes on the scope of the fourth

quarter rebound.  

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

[TOPICS: M$C$$$]