In a video-broadcast speech to a business group quoted by Reuters, Bank of Canada Governor Lawrence Schembri, said on Tuesday that the relationship between labor market conditions and inflation has weakened and has become more difficult to measure, making it more difficult to know when the economic slack absorbed has occurred.
Featured statements
“There is uncertainty about the maximum sustainable employment level and the relationship between labor market conditions and inflation.”
“Understanding how high the level of employment can go without causing inflation is crucial.”
“The evidence suggests that with inflation expectations firmly anchored, the relationship between inflation and the output gap has weakened.”
“It is likely that the structural forces affecting the Canadian labor market are causing the maximum sustainable employment level to change, making it difficult to identify.”
“Traditional tools for measuring employment are not as useful as they used to be” and the “bank is looking for new ways to measure available capacity in the labor market.”
“The bank has developed new tools to measure the impact of the Covid-19 pandemic on workers and employers.”
“Despite the recent rise in inflation, medium-term inflation expectations have remained relatively well anchored.”
“There is still considerable overcapacity in the labor market” and unemployment and underemployment rates remain high. “
“We expect the impact of the pandemic to have some healing effects and could see the skills of long-term unemployed workers erode and their attachment to the labor market weaken.”
Market reaction
The loonie hasn’t seen any notable reaction to the BoC’s latest rhetoric. The comments mainly refer to a greater degree of uncertainty faced by the BoC authorities, including regarding the NAIRU, or the unaccelerated inflation rate of unemployment. This is defined as the specific level of unemployment that is evident in an economy that does not cause an increase in inflation.
The comments do not discuss the BoC’s policy outlook and are therefore unlikely to affect market expectations.
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