UPDATE 1-Bank of Canada says harder to measure how labor market affects inflation

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(Adds links to Lt Governor’s quotes, background, story)

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OTTAWA, Nov 16 (Businesshala) – The link between labor market conditions and inflation has weakened and become harder to measure, making it difficult to know when the output gap will close, the Bank of Canada deputy governor said. said on Tuesday.

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In a videocast speech to a trade group, Lawrence Schembri said structural changes in the labor market were accelerated by the pandemic and that those changes have made traditional tools for easing the economic slowdown less useful.

“Evidence for Canada indicates that the relationship between labor market conditions and inflationary pressures has weakened and become difficult to measure – particularly in periods of excess demand,” he said.

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“This uncertainty is closely related to the ambiguity about the level of maximum permanent employment.”

Traditionally, inflation should return to target when the economic slowdown is absorbed and the economy returns to maximum employment. But the changes are making that relationship less clear, Schembri said.

As a result, there is more uncertainty as to when the output gap will close and the central bank will be in a position to start raising interest rates.

Schembri said the Bank of Canada has developed new tools to measure the impact of the COVID-19 pandemic on employers and workers, and is looking at new ways to measure the slowdown in the labor market.

Governor Tiff McCalem said in a newspaper Monday that the economic slowdown has not yet been absorbed, but it is drawing to a close. The bank had last month indicated that it may start raising rates by April 2022.

Money markets are betting that the first hike will happen in March 2022, with five increases that year.

The Canadian dollar was trading 0.3% lower at 1.2554 on the greenback, or 79.66 US cents, as the US dollar climbed ground against a basket of major currencies. (Reporting by Julie Gordon and David Ljunggren in Ottawa; Additional reporting by Fergal Smith in Toronto)

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