OTTAWA: Bank of Canada (BoC) governor Tiff Macklem says the country’s economy is headed for a soft landing, suggesting the central bank expects the unemployment rate to rise but that a large increase isn’t needed to achieve the inflation target.
Macklem said Canada’s unemployment rate – which hit 6.2% in May – was “just above” pre-pandemic levels, when the labour market was close to “maximum sustainable employment” – the highest level of jobs an economy can have without stoking inflation.
“We continue to think that we don’t need a large rise in the unemployment rate to get inflation back to the 2% target,” Macklem said in a speech he delivered in Winnipeg.
Canada’s labour market has loosened and is “closer to being in balance,” he said.
It’s harder to find a new job, which is particularly affecting young workers and newcomers who are facing unemployment rates that are rising faster than those of other Canadians, he added.
The speech suggests the BoC is increasingly confident that the country’s labour market has loosened sufficiently to allow a further cooling in inflation, even as the economy continues to grow and add jobs.
Speaking to reporters after the speech, Macklem said it’s reasonable to expect further interest rate cuts if price pressures continue to ease.
“We don’t want monetary policy to be more restrictive than it has to be,” Macklem said. At the same time, officials don’t want to lower borrowing costs “too quickly” and jeopardise progress on inflation, he added.
Macklem said that while the bank sees sticky wage growth above pre-pandemic levels, the rebalancing of the labour market and lower inflation is starting to moderate compensation pressures.
“Wages tend to lag adjustments in employment,” Macklem said. “Going forward, we will be looking for wage growth to moderate further.”
Faster growth in the unemployment rates of newcomers means Prime Minister Justin Trudeau’s federal government “has some room” to slow the growth of non-permanent residents without causing labour shortages or tightening the labour market, he said.
“There are limits to how quickly we can absorb people into the economy, there are limits to our immigration policy,” Macklem told reporters, adding that the population inflows have been a “key source of growth.” — Bloomberg
