(reconsidering rate hike guidance)
OTTAWA, Nov 16 (Businesshala) – The Bank of Canada still expects the economic slowdown to be absorbed in the mid-quarters of 2022, but that doesn’t necessarily mean a second quarter, a deputy governor said on Tuesday, potentially Dashing Market Expectations Initial Rate Hike.
Lawrence Schembri reiterated in an audience question-and-answer session after a speech on labor market uncertainty that a rise in the benchmark rate would only happen if excess capacity is absorbed so that the central bank’s 2% inflation target can be achieved in a sustainable manner .
“There’s a lot of uncertainty about the timing of closing the output gap, so one should be careful that it’s not necessarily the second quarter. It’s a six-month period – that’s our best guess,” he said.
The Bank of Canada said last month that the output gap could close by April 2022, which could lead to higher interest rates. Governor Tiff McCalem said on Monday that the economic slowdown is still not over, but it is drawing closer.
Money markets are betting that the first hike will happen in March 2022, with five hikes next year. The bank reduced its key overnight rate to a record 0.25% in March 2020 due to the outbreak of the COVID-19 pandemic.
Knowing when the output gap has closed is becoming more and more difficult, Schembri said in his speech, as the relationship between labor market conditions and inflation has weakened and become harder to measure.
Traditionally, inflation should return to target when the economic slowdown is absorbed and the economy returns to maximum employment. But structural changes in the labor market were accelerated by the pandemic, and those changes have made traditional tools less useful to use, he said.
“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.
“This uncertainty is closely related to the ambiguity about the level of maximum permanent employment.”
Schembri said the bank has developed new tools to measure the pandemic’s impact on employers and workers and is looking at new ways to measure the slowdown in the labor market.
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; Editing by Cynthia Osterman)