MNI:BOC's Wilkins Reaffirms Cautious Approach;Still Labr Slack

--Too Early To Tell If Wage/Inflation Link Weaker

By Yali N'Diaye

     OTTAWA (MNI) - Bank of Canada Senior Deputy Governor Carolyn Wilkins

reaffirmed Wednesday the "cautious" approach of the central bank as it proceeds

to tightening, especially given the economy's sensitivity to higher interest

rates than in the past and ongoing slack in the labor market.

     That being said, Wilkins indicated during an interview with Bloomberg TV

that as economic growth continues to improve, "wages are going to start to

rise."

     That, in turn, should help inflation rise, since the central banker

stressed inflation today is a function of past slack. So looking forward, as

economic slack is being absorbed, the "drag on inflation is going to go away."

     Wilkins continues to believe the reverse relationship between inflation and

unemployment described by the Phillips curve is indeed still valid.

     "We don't see that that relationship has gone away completely," she said.

She added it is "too early to tell" whether the relationship has really

weakened. "We have to get through the cycle" to gauge the impact of factors such

as globalization on this relationship, Wilkins continued, stressing the need to

keep "an open mind". 

     Canada is not the only country where a strengthening labor market has

failed to translate into meaningful wage growth.

     But in the case of Canada, there is the specific "legacy of the oil price

shock," with former higher-paid oil industry workers moving into lower-paid jobs

in other industries.

     So "there is still slack in the labor market in Canada," Wilkins said,

contributing to the BOC's cautious approach.

     Uncertainty about the outcome of NAFTA negotiations and the elevated

household debt are two other factors that keep the central bank cautious,

echoing the BOC's October 25 policy statement, and recent comments made by

Governor Stephen Poloz.

     Wilkins repeated the BOC is factoring into its policy the fact that

household debt has risen to elevated levels by building the higher sensitivity

of the economy into its model. But this is not something that has been

historically experienced, so "we need to be cautious and wait and see," Wilkins

said.

     On the external front, she repeated that while the BOC has integrated some

uncertainty related to NAFTA in terms of business investment, "there is just too

many possibilities for us to factor that into policy at this stage."

     For now, she said, Canadian businesses are still planning to invest in

Canada.

     Wilkins gave the interview before a speech on "Monetary policy under

uncertainty" at 6:45 pm ET to the Money Marketeers of New York University in New

York. 

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

[TOPICS: M$C$$$]