Canadian Manufacturing

Bank of Canada will consider consider job market in rate decisions

The bank may decide to allow inflation to sit at closer to either end of the bank's target range for short bursts as it determines when the labour market hits its full potential.

December 13, 2021  The Canadian Press

Canada’s central bank has been told to keep the annual pace of price gains at its historic target, but also to help build up the labour market.

Since 1991, the Bank of Canada has targeted an annual inflation rate of between one and three per cent, often landing in a sweet spot at two per cent.

That range remains at the centre of the renewed inflation-targeting agreement with the federal government.

However, the new five-year deal outlines how the bank should consider how close employment levels are to the highest mark can hit before fuelling inflationary problems.

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The bank may decide to allow inflation to sit at closer to either end of the bank’s target range for short bursts as it determines when the labour market hits its full potential.

It also could mean that the central bank keeps its trendsetting interest rate at the lowest level possible for longer stretches to help the economy recover from a downturn.

The key policy rate since the start of the pandemic has been at 0.25 per cent, lowered there to prod spending during the COVID-19 induced downturn and subsequent rebound.

As it stands, the bank doesn’t see a rate bump until April 2022 at the earliest.

Under the agreement unveiled on Dec. 13, the central bank says the rate may more often hit that rock-bottom level, and remain there for longer if the bank believes it will help get inflation back on target.

Documents released by the bank say that a low-for-longer rate environment boosts the likelihood that inflation could overshoot the two per cent target as the economy recovers.

Rate hikes would only happen after inflationary pressures build, but not before inflation hits two per cent.

As well, rate increases could be more gradual than in the past as the bank figures out if it has properly estimated the full potential of the labour market, meaning that inflation could again rise above the bank’s target.

Governor Tiff Macklem and other senior central bank officials have repeatedly spoken of the need for the labour market to heal from the wounds caused by COVID-19 before the bank would rein in its economic stimulus, even as annual inflation rates have recently crept up.