Bank of Canada Expected to Continue Monetary Support
The Bank of Canada’s Governor Tiff Macklem has declared an intention to oversee a “complete” recovery from the COVID-19 recession, a goal that, based on his public references, remains a considerable distance away. While the pace of progress has recently accelerated, a truly comprehensive rebound – one that includes a return to pre-pandemic employment levels and a significant reduction in the unemployment rate – represents a sustained and ambitious undertaking. Macklem’s approach is predicated on several key indicators, suggesting that he won’t relax his monetary policy stance until the jobless rate drops below six percent and employment reaches approximately 19.3 million – figures that represent his unofficial targets. Furthermore, Macklem consistently emphasizes the need to ensure that no segments of the population are left behind, specifically highlighting the importance of supporting women, youth, and other groups that were disproportionately impacted by the economic fallout of the crisis.
The recent data, released on July 9th, show a noteworthy turnaround. Employment figures increased by 240,000 in June, effectively reversing the losses recorded in April and May, when several provinces implemented measures to curb the spread of the coronavirus. This brought total employment to 18.8 million, a figure that remains approximately three percent below the levels seen in February 2020 and just shy of Macklem’s primary objective. The unemployment rate fell to 7.8 percent, having previously risen to 8.2 percent in May. This decline was largely driven by a surge in part-time hiring across various sectors, including restaurants and retail establishments, which were permitted to reopen as restrictions eased. Statistics Canada’s latest Labour Force Survey, completed on June 19th, indicates that the agency’s initial estimates may have understated the magnitude of the hiring surge observed in June.
A particularly crucial gauge under Macklem’s scrutiny, the number of employees earning paychecks, crossed its pre-pandemic threshold in June, suggesting that much of the lingering weakness stems from self-employment. But perhaps more importantly, employment within two lower-wage groups finally rebounded to levels last seen in February. This represents tangible progress, signifying a move towards a more robust and inclusive recovery. This shift is central to Macklem’s strategy, demonstrating his commitment to addressing the needs of all segments of the workforce.
The recovery is being fueled by a series of positive developments. Statistics Canada’s Business Outlook Survey (BOS), conducted prior to the July 9th announcement, indicates that business executives are anticipating a significant boost in demand as health restrictions continue to loosen. The survey also flagged emerging inflationary pressures, which may prompt the Bank of Canada to cautiously reduce its monetary stimulus, anticipating potential price increases. The overall business sentiment index, calculated by the Bank of Canada, reached its highest record level, reflecting a palpable sense of optimism among business leaders. Crucially, no companies reported a deterioration in demand; however, 40 percent of respondents noted that sales were weaker than a year prior, and many of the hardest-hit businesses remain skeptical about their ability to return to previous levels of revenue over the next 12 months. The level of optimism is, in part, a reaction to the severity of the economic situation in early 2020.
The resurgence in employment is accompanied by growing expectations of upward price pressures. Thirty-five percent of respondents predicted inflation to exceed three percent over the next 12 months, a notably higher figure than the 13 percent recorded in the previous survey, suggesting that the Bank of Canada is struggling to contain inflationary expectations. The survey also revealed that a substantial majority – 87 percent – anticipated that inflation would hold between two and three percent, an increase from the previous quarter, highlighting the Bank of Canada’s efforts to prevent deflation, a risk that dominated its concerns during the initial stages of the pandemic. Furthermore, companies expressed a strong expectation that prime interest rates would increase over the next two years, driven by the Bank of Canada’s planned reduction in its bond-buying program.
The Bank of Canada finds itself navigating a complex situation. While Governor Macklem and his deputies are confident that the inflationary spike experienced this spring is temporary, they are proceeding with caution. They are aware that over-aggressive measures to combat inflation could inadvertently stifle a recovery that remains significantly short of Macklem’s goals. The central bank’s primary objective remains full employment. It is likely to err on the side of growth, especially if the data don’t support a more restrictive policy. Before her departure at the end of last year, Carolyn Wilkins, the former senior deputy governor, suggested that the Bank of Canada could “probe” the limits of its inflation mandate, acknowledging a potential trade-off between achieving full employment and maintaining the target of two percent. The ultimate focus remains on fostering a sustainable and inclusive economic recovery.
