the city of OTTAWA, Canada
According to economists, Canada’s return to pre-pandemic employment levels, coupled with high inflation, has clinched the deal on the Bank of Canada stopping its quantitative easing program this month.
Canadian job creation surpassed forecasts in September with a gain of 157,100 positions, regaining all three million positions lost during the financial crisis.
Inflation has risen to its highest level in 18 years, more than double the Bank of Canada’s 2% objective.
Tiff Macklem, the governor, said on Thursday that the reasons driving inflation were mostly transitory and that the central bank was still experiencing labor market hardship, including a persistent mismatch between workers and employers and weak wage growth..
However, other experts believe the Bank of Canada is being overly cautious and argue that even if difficulties remain, there is no reason to continue operating as if Canada’s economy is in a state of crisis.
“We still have emergency levels of stimulus,” said Derek Holt, chief economist at Scotiabank Economics, “which were put in place because of deflation worries.
“(Now) we’re well above our inflation objective,” says the president.
“An increase in interest rates is expected before the end of the year.
But that’s not going to be easy for them to accomplish.
As for how long they’ll fight it, Holt predicted.
The central bank has ample cause to be cautious.
As a result of the rise in the size of Canada’s work force that occurred during this epidemic, full employment is still roughly 276,000 jobs away in Canada.
Despite companies claiming they can’t find enough workers to fill their positions, many people are still having difficulty finding work.
Pay isn’t rising at a typical rate, though. It grew just 1.7% year-over-year in September, compared to 4.3% in February 2020.
A senior Canada economist at Capital Economics says the pay data is still mild and that part of it is transitory as lower-paid people return to work and drive down national averages.
But “waiting a few months to see how everything plays out” isn’t going to cost the Bank anything, according to Brown.
When it makes its next interest rate decision on Oct. 27, the Bank of Canada is expected to reduce its quantitative easing program from C$2 billion a week to C$1 billion ($802 million).
New bonds acquired would merely replace those that mature, essentially halting additional stimulus from being supplied to the economy. This would convert QE to a reinvestment phase.
It’s a different story when you take economic stimulus away.
The first move, according to Macklem, would be to raise interest rates, which the Bank of Canada has said would not occur until the second half of 2022.
When it comes to expectations for a BoC rate rise, Canada’s 2-year yield has moved up 5.2 basis points to 0.690 percent, the highest level since March of last year.
According to Doug Porter, chief economist of BMO Capital Markets, “we still anticipate the Bank of Canada to start raising a year hence, but the risks are rising fast that they start earlier.”.
Instead of happening every six months, Porter now anticipates such price increases to happen once every three months.
After Friday’s employment report, the Canadian currency rose by as much as 0.8%, reaching its highest level in almost two months at 1.2447 Canadian dollars per greenback, or 84.34 U.S. cents.
Check out our economic calendar to see what’s going on today in the world of business.
For every US dollar, there are 1.2473 Canadian dollars.
(Julie Gordon in Ottawa contributed reporting, with assistance from Fergal Smith in Toronto. Alistair Bell edited the piece.)
