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--Last Wage Figures Encouraging But Need More Data
By Yali N'Diaye
     OTTAWA (MNI) - While inflation readings have been consistently below the 2%
mid-point target, Bank of Canada Governor Stephen Poloz said Tuesday there was
no evidence inflation expectations were "de-anchoring", pointing at surveys
showing instead that inflation expectations are well anchored.
     During a press conference following a speech to the CFA Montreal and
Montreal Council on Foreign Relations, Poloz also insisted on the symmetric
nature of the inflation framework, and the 18-month horizon, allowing some
flexibility within the 1% to 3% target range. So just as inflation is currently
below 2%, the BOC could let it go above 2% if need be, notably if it was
explained by temporary factors.
     For inflation to be an issue from a policy standpoint, the trend itself
would have to change, Poloz said.
     Oil prices can be such a temporary factor. The central banker suggested he
is looking through the recent oil price increase, since the impact of short-term
oil price moves will eventually fall 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 quick
supply response that U.S. suppliers can deliver.
     Instead, the BOC is particularly looking at wage developments, with Poloz
stressing the "low" trend line for wage growth. Although the latest figures have
been encouraging, "you never know if it's the beginning of an uptrend," he said.
So more data points will be needed.
     In his prepared remarks earlier, he said, "indicators suggest that a fair
amount of slack remains" in the labor market, stressing the need to monitor how
such slack is being absorbed.
     Eventually, however, he does expect wage growth to finally translate into
higher inflation.
     "We believe that there is still a link between labor market slack and
wages, just as there is still a link between inflation and the balance of total
supply and demand," Poloz said. "What this means is that the closer we get to
full output and employment, the greater the risk that inflation pressures will
appear."
--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com
[TOPICS: M$C$$$]

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