Bank of Canada’s Labor-Market Worries Kept It on Sidelines


Bank of Canada officials were driven by concern about the uneven labor market recovery in deciding this week to maintain extraordinary monetary stimulus.

In a speech Thursday aimed at providing insights into the bank’s discussions, Deputy Governor Lawrence Schembri said the central bank’s governing council spent a lot of time weighing both positive and negative signals in recent economic data, but concluded the economy continues to need support.

Bank of Canada’s Labor-Market Worries Kept It on Sidelines

“Ultimately, Governing Council decided that the economy still requires extraordinary support from our monetary policy,” Schembri said Thursday in prepared remarks. He cited the rise in long-term unemployment coupled with uneven impacts of job losses, along with uncertainty around the evolution of the virus.

Schembri’s language is largely in line with Wednesday’s statement that provided little sign the central bank is ready to pare back ultra-easy monetary policy, in part because of weakness in the labor market. That’s despite a recent string of data showing surprising strength in the economy.

As a result, investors will be looking closely at February jobs data due Friday morning from Statistics Canada for clues as to when the central bank might begin reducing bond purchases or consider adjusting interest rates.

‘Mixed Story’

The deputy governor said the economy has more momentum than the central bank has been predicting, driven by everything from housing to rising commodity prices. At the same time, the governing council found recent data showed a “mixed story” about the labor market, “which remains a long way from a full recovery.”

Central bank officials also debated how capacity has evolved over the pandemic -- a key determinant of slack in the economy. That’s an issue the Bank of Canada will explore further in April in its next Monetary Policy Report, when it will also update its forecasts on how quickly the economy will repair damage from the pandemic.

“We reaffirmed our commitment to keep our key policy rate at a record low 0.25% until economic slack is absorbed, so inflation can return sustainably to its 2% target,” Schembri said. “In our January forecast, we projected this would not happen until into 2023. We will update our forecast in April.”

Bank of Canada’s Labor-Market Worries Kept It on Sidelines

Schembri did acknowledge that the bank will revise its near-term inflation outlook higher, though it still believes the pick up will be temporary given excess capacity in the economy.

“We now expect that inflation will move temporarily above our 2% target in the coming months, to around the top of the 1 to 3% control range,” Schembri said. “That reflects rising prices for gasoline, combined with adjustments from the prices of numerous goods and services that fell sharply when the pandemic struck a year ago.”

He added: “We then expect inflation to moderate, given excess capacity in the economy.”

Housing Concern

Schembri noted the bank is closely watching the housing market for “speculative activity.” Low borrowing costs and a shift toward remote work have increased demand for single-family homes, driving large increases in prices in major markets. The price gains have been resilient, continuing amid winter lockdowns when many businesses shut down again. That’s causing policy makers to look closely for any excess exuberance in the market.

The deputy governor said the three main risks to a return to normalcy were a third wave of infections and lockdowns, vaccine rollout delays and uncertainty around virus variants.

His speech also took a closer look at the build-up of savings during the pandemic, which Schembri estimated at C$180 billion ($143 billion). In its January projections, the bank assumed those savings would not be spent, but Schembri said “a positive surprise to spending is possible, especially if the virus is brought under control and household confidence improves.”

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