Jobs recovery bolsters case for Bank of Canada to hike soon

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The “complete” recovery from the COVID-19 recession that Bank of Canada governor Tiff Macklem said he wanted to orchestrate is within view, meaning the time for ultra-low interest rates is over.

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Employers created another 55,000 positions in December, putting total employment back to where it would have been if the trend hadn’t been interrupted by an epic economic collapse in March 2020, according to data released by Statistics Canada on Jan. 7.

The jobless rate dropped to 5.9 per cent, somewhat higher than before the pandemic, but now comfortably in a zone many economists associate with full employment.

Macklem has spent the past 18 months explaining that the labour market is too complex to be summed up by those two headline figures. He and his deputies have been using an array of more granular indicators to obtain a more qualitative assessment of the strength of the labour market.

The United States Federal Reserve introduced a similar methodology in the aftermath of the Great Recession, discovering it could keep interest rates lower than it had previously thought without stoking inflation.

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“Traditional labour market indicators, such as the unemployment rate, did not fully capture the experiences of different workers over the course of the pandemic,” Lawrence Schembri, a deputy governor, said in a speech on Nov. 16. “The persistence of this uneven impact over the past year and a half has highlighted the need to develop an expanded and integrated set of labour market indicators.”

Many of those indicators are now back at pre-pandemic levels, enhancing the case for an interest-rate increase soon, perhaps even at the end of January when policy-makers next gather to update their assessment of the economy and recalibrate policy.

The latest wave of COVID-19 infections will give them pause. But whereas the Great Recession was followed by a long period of disappointing economic growth, the recovery from the pandemic-driven recession has stoked worrying levels of inflation around the world.

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The index Statistics Canada uses to track prices of raw materials surged 36.2 per cent in November from a year earlier, while its index of prices for industrial products increased 18 per cent over the same period.

It’s reasonable to assume a significant portion of the population is as concerned about the cost of living as it is about the pandemic. Bloomberg News reported this week that almost nine in 10 respondents to a poll by Nanos Research said they are more worried about the current pace of rising prices than they are about higher interest rates.

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To be sure, the employment numbers are about to experience a setback. Statistics Canada’s latest Labour Force Survey was completed before Quebec, Ontario and other provinces initiated new health restrictions to slow the spread of the Omicron variant. Anecdotal evidence of a COVID-19-induced soft patch could prompt the Bank of Canada to leave interest rates unchanged at its Jan. 26 policy announcement.

“Without Omicron, the Bank of Canada would have likely had the green light to start raising interest rates at its January 26 meeting,” Sébastien Lavoie, chief economist at Laurentian Bank Securities and a former Bank of Canada staffer, said in a note to his clients. “But given the current wave and its negative impact on workers in services industries, and that (gross domestic product) should contract moderately in January, it appears difficult from a communication standpoint to justify a policy hike as soon as this month.”

The next scheduled opportunities to raise interest rates for the first time since the start of the pandemic would be March 2 and April 13.

Lavoie said he thinks Macklem will wait until April, but acknowledged March is definitely possible. The Canadian economy is getting better at pushing through waves of COVID-19 infections, so there is little reason to bet that the pandemic will knock the Bank of Canada off its course to remove stimulus as soon as possible. The data argue against waiting.

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