BoC to place ‘greater focus’ on labour market stats

“For markets, the takeaway is that the [Bank of Canada] will be more tolerant of inflation inside the 1%-to-3% band, rather than always focusing on 2%, as long as inflation expectations are anchored. That will enable them to keep policy easier for longer if the labour market warrants it,” wrote Benjamin Reitzes, director of Canadian rates and macro strategist for the Bank of Montreal, in a report on Monday.

The adjustment to the framework didn’t impact interest rate forecasts for CIBC or RBC, which both maintained their forecasts of three rate hikes next year.

“Markets are looking for a fairly aggressive pace for Bank of Canada rate hikes in 2022,” CIBC chief economist Avery Shenfeld said in a research note on Monday.

CIBC maintained its call for the first of three hikes next year to come in April, followed by another 75 basis point increase in 2023.

“That gradualist approach isn’t a reflection of any changes made to the BoC mandate, but captures our view that, at least early in the year, progress will be held back by the resurgence of Covid at home and in Canada’s export markets,” Shenfeld said.

In its 84-page report released Monday, the Bank of Canada said it “will consider a broader range of labour market indicators to actively seek the level of maximum sustainable employment needed to keep inflation on target.”

The most common labour market metric is the unemployment rate, which is defined as the percentage of the labour force that does not have a job and is actively looking for work. But the employment rate — the number of employed people as a share of the working-age population — is another metric. That rate has risen over time, mainly due to increases in the employment rate for women until the early 2000s, the Bank of Canada noted.

“It’s clear that the employment aspect is going to be used as needed rather than providing a firm restriction on policy, though it provides a bit more flexibility for the BoC,” wrote Reitzes.

“Today’s agreement essentially codifies the [Bank of Canada’s] greater focus on labour market outcomes during the pandemic,” RBC senior economist Josh Nye wrote in the bank’s daily economic update released Monday.

Since 1991, the Bank of Canada and the federal government have been aiming to keep annual inflation at or near 2%. That general practice followed high inflation rates during the 1980s. If inflation rises above the target rate, the Bank of Canada might raise the overnight interest rate in the hopes that will curb demand for goods and services and put downward pressure on inflation.

The Bank of Canada’s renewed agreement, released Monday, stipulates the inflation target will continue to be the “2% mid-point of the 1 to 3 % inflation-control range.”

Canada recorded an annual inflation rate of 4.7% in October.

But on Dec. 8, the Bank of Canada said the overnight rate will remain at 0.25% for now, an historic low.

In reaction to the monetary policy framework released Dec. 13, CIBC suggested it’s unlikely that labour market performance will be the Bank of Canada’s “decisive factor” in deciding when to hike interest rates again.

“This is not a dual mandate with an equal weighting on inflation and full employment, but is still a mandate centred on inflation,” Shenfeld wrote.

The Bank of Canada has an “ongoing commitment to keep interest rates low until economic slack is absorbed, with indicators of labour market slack being key to that assessment,” Nye wrote for RBC.

“Before the Covid-19 pandemic, the unemployment rate was close to a historic low due to strong gains in full-time jobs in the service sector,” the Bank of Canada said in its Monetary Policy Framework Renewal document.

But since then, the pandemic had a large and uneven impact on the labour market, the Bank of Canada observes.

This is especially true in service jobs where physical distancing is either difficult or impossible.