Wages Key to Pace of Bank of Canada’s Remaining Rate Hikes
The pace at which the Bank of Canada raises interest rates over the rest of the year appears to be heavily influenced by wages. This is according to senior deputy governor Carolyn Rogers, who stated that the central bank is wary of a wage-price spiral.
The Labor Market: A Tight Spot
In an economic speech delivered on September 8 in Calgary, Rogers described the labor market as tight. This situation contributes to the central bank’s determination that demand has exceeded the economy’s ability to keep up with orders. As a result, fueling inflation, which clocked in at an annual rate of 7.6 percent in July.
The Impact on Inflation
According to Rogers, workers are looking at the current rate of inflation and how it affects their purchasing power, budgets, and considering the tight labor market, they believe they need a raise. This sentiment is a concern for the central bank as it could lead to a wage-price spiral, which would cause inflation to become entrenched.
Central Bank’s Response
Tiff Macklem, the governor of the Bank of Canada, has stated that one of the reasons he is raising interest rates so quickly is to prevent those expectations from taking root. He believes that whatever pain caused now will be less than what would be required to crush inflation if households and businesses lose faith in the two-per-cent target.
Rogers on Inflation Expectations
In a statement, Rogers emphasized that "entrenchment" of inflation expectations "would be damaging to the economy." However, he also clarified that it was not the central bank’s place to provide advice on setting wages. This point was made in response to earlier comments by Macklem, which were interpreted by some as encouraging employers to suppress wages.
Comments from Macklem
In a July 14 question-and-answer session hosted by the Canadian Federation of Independent Business, Macklem stated that it was not advisable for businesses to plan on the current rate of inflation staying. He encouraged his audience to believe him when he says the Bank of Canada will do what is necessary to get inflation under control.
The Economy Slowing Down
There are signs that the economy is slowing down. The labor market loosened somewhat in August, as the Canadian economy lost 40,000 jobs. This caused the unemployment rate to rise to 5.4 percent, a far cry from the 15,000 job gain that Bay Street economists were expecting.
Impact on Wages
According to Royce Mendes, an economist at Desjardins Group, the average hourly wage rate rose 5.6 percent from August 2021, which was a faster pace than analysts expected. Rogers stated that they will be watching wages closely and need supply and demand to come back in balance across the economy and particularly in labor markets.
Conclusion
The central bank’s priority is to prevent the entrenchment of inflation expectations, which would be damaging to the economy. With wages playing a key role in this decision-making process, it remains to be seen how interest rates will change over the coming months.
Sources:
- "Bank of Canada raises rate 75 bps and signals more hikes to come"
- "Carolyn Rogers says inflation won’t come down overnight"
- "Bay Street economists expect 15,000 job gain in August"
These articles provide insight into the current economic situation and how it is impacting interest rates. The quotes from Carolyn Rogers and Tiff Macklem offer a glimpse into the central bank’s thinking on this matter.
