EconoFACTS

February 23, 2021 | 13:31

Dovish BoC Governor Macklem Highlights Labour Market Slack

Economist

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Bank of Canada Governor Macklem's speech highlighted the slack in the labour market and how it will take some time to heal. He notes that stimulus will be needed for a "considerable period" and that a complete recovery is "still a long way off". Even so, "with vaccinations expected to ramp up, we can be more confident in sustained strong growth through the second half of the year and into next year."

Two quotes caught our eye (I've bolded and underlined for emphasis):

"Indeed, at its heart, inflation targeting is about achieving low inflation together with full employment because to sustainably achieve either, we need both. Without full employment, inflation will not stay close to its 2 percent target because the shortfall in jobs and incomes will pull inflation down."

"Unemployment had been around 40-year lows for a couple of years. Based on past economic cycles, we would have expected inflationary pressure to begin to rise. But inflation wasn’t threatening to take off. As the pandemic recedes and the recovery continues, we will keep that experience in mind."

The first quote suggests perhaps a bit more emphasis on the unemployment rate, and highlights the possibility of including full employment in the BoC's mandate which is being renewed this year. The Bank is starting to sound very much like to the Federal Reserve in their bid to support the labour market.

The second quote suggests that the BoC will be in no rush to tighten as inflation was muted pre-pandemic despite the low unemployment rate.

For those with an eye on housing, Governor Macklem was asked about the market during the Q&A and didn't sound too concerned about overheating. He noted that they're seeing "early signs" of excesses, but not like in 2016/2017. We'll see on that one.

Key Takeaway: There isn't that much new here from Macklem, as he reiterated that stimulus is going to be needed for some time and a full recovery is a long way off despite the positive outlook for the second half of the year and 2022. The twist is the increased focus on labour market healing, which could mean a longer lasting dovish policy bias. Macklem's press conference is up next in about 20 minutes.