3 things Carolyn Rogers said about how the Bank of Canada thinks about the economy

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Bank of Canada Deputy Governor Carolyn Rogers followed the central bank’s March 8 decision to leave interest rates unchanged with a speech in Winnipeg, which added subtle context to how policymakers feel about inflation and whether they may need to raise interest rates again. Here’s what you need to know:

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Canada is not an island

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Currency is the talk of the town on Bay Street this week. Ahead of Bank of Canada Governor Tiff Macklem’s decision to leave interest rates unchanged, his colleagues at the European Central Bank and US Federal Reserve made it clear that their inflation battles are far from over.

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All in all, higher interest rates in the US and Europe will make those places more attractive destinations for short-term investments, favoring the dollar and euro over other currencies. A weaker currency could push up inflation by making imports more expensive. So if the Fed and ECB hike rates, some analysts think the Bank of Canada will have to keep pace to keep the exchange rate stable.

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Rogers pointed out that the Bank of Canada knows conditions in the US and Europe could force their hand, but perhaps not because of exchange rates. She stressed that Canada’s largest trading partners appear to be growing faster than expected. She also said that this was something that policymakers had been discussing during recent deliberations.

“We found that in the United States and Europe, the near-term outlook for growth and inflation is now slightly higher than we anticipated in January,” Rogers said. “Labor markets in particular remain tight and core inflation is still high. As these are our main trading partners, this could indicate further inflationary pressures in Canada.”

This inflationary pressure could come from buying imports with a weaker currency. But the inflationary risk the Bank of Canada seems most concerned about is the combination of a weak currency and sustained export demand. That could fuel growth just as the central bank tries to slow the economy.

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Rogers noted that energy prices are stable, which may offset unexpected inflationary pressures. But she also said China’s economy is recovering now that the authorities have abandoned their zero-COVID-19 policies and Russia’s war on Ukraine remains a source of uncertainty. Both could spark commodity prices at any time.

“With inflation still well above our target, we are even more concerned about upside risks,” she said.

Overdressed

“We talked a lot about the job market,” Rogers said.

That’s because the most aggressive series of rate hikes in the central bank’s history over the past year appears to have had little impact on hiring. The unemployment rate is holding near historic lows, complicating Bank of Canada’s strategy as its models suggest the unemployment rate needs to rise at least somewhat to moderate inflation.

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For now, the central bank is sticking to logic: The economy stalled in the fourth quarter, so hiring must follow. “The job market remains very tight,” Rogers said. “However, given weak economic growth over the next few quarters, we expect labor market tensions to ease and wage pressures to ease.”

The labor market remains very tight

Caroline Rogers

The Bank of Canada doesn’t mind anyone getting a raise, but a tight labor market is putting upward pressure on wages, and that’s affecting demand. At present, the central bank believes that demand is greater than suppliers of goods and services can supply. That’s a recipe for inflation.

It’s productivity, fool

Various indicators show that wages are increasing by between four and five percent each year. That’s positive in many ways, given that wage growth has been chronically weak. But the Bank of Canada claims wage growth at this rate is more than the economy can handle without overheating. This is because the suppliers cannot keep up and end up charging more for the goods and services they provide.

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But what if supplies could keep up? One of the reasons is that Canadian productivity is so weak. In other words, companies have invested too little money and time in innovation and built capacity to cope with increased demand.

The Bank of Canada cannot do much about that.

“You may recall that I said that if strong wage growth isn’t accompanied by strong productivity growth, it’s going to be difficult to get to 2% inflation,” Rogers said. “Well, we noticed that last week’s data showed that labor productivity in Canada fell for the third straight quarter, so productivity isn’t trending in the right direction so far.”

Some of the politicians, executives and union leaders who tend to blame the Bank of Canada for inflation might want to think a little more carefully about where the fault lies.

• Email: kcarmichael@postmedia.com | Twitter: carmichaelkevin