Jobs blockbuster changes equation ahead of Bank of Canada rate decision

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Bay Street economists typically pull their punches, making the haymaker aimed at the Bank of Canada last week hard to ignore.

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“Let us be blunt: Having achieved full employment, Canada no longer requires extraordinarily stimulative monetary policy,” Warren Lovely, National Bank’s chief debt strategist, and Stéfane Marion, the bank’s chief economist, wrote after Statistics Canada released its latest batch of hiring data on Dec. 3.

Employers added 154,000 jobs in November , far more than most forecasters were expecting, putting total employment back to where it would have been if the COVID-19 crisis hadn’t interrupted the trend early in 2020. Even more startling was the jobless rate, which plunged to six per cent from 6.7 per cent, and now sits at a level some economists associate with “full employment,” a statistical nirvana where it’s assumed that everyone who wants a job has one, and, therefore, any additional growth would stoke price pressures.

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The jobs numbers have changed the weather ahead of the Bank of Canada’s final interest-rate decision of the year on Dec. 8. The Canadian dollar surged half a cent in a matter of seconds after the Labour Force Survey’s release, a signal that the odds over the timing of higher interest rates shifted in the aftermath of the latest Labour Force Survey, despite weaker oil prices and widespread trepidation about what the Omicron variant could mean for global trade.

Arlene Kish, director of Canadian economics at data firm IHS Markit, warned clients that her prediction the first post-pandemic rate increase would come in July is now probably wrong. With year-over-year increases in the consumer price index (CPI) approaching five per cent, a central bank whose sole job is keeping the CPI advancing at an annual pace of around two per cent will be hard pressed to coast into 2022, especially with the labour market flirting with full employment.

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The United States Federal Reserve waved a white flag last week , as chair Jerome Powell conceded it was probably time to “retire” the characterization of inflationary pressures as transitory.

The benchmark interest rate was 1.75% when employment was last this high

A jobless rate of six per cent is “consistent with the start of previous tightening cycles by the Bank of Canada,” said Charles St-Arnaud, a former Bank of Canada staffer who is now chief economist at Alberta Central, who advanced his prediction of when governor Tiff Macklem will raise the benchmark rate to April from an earlier estimate of July. “With the recovery expected to continue, further improvement in the labour market is expected, reducing the amount of slack further.”

Macklem and his deputies probably hoped to use the December announcement as a bridge to their next gathering at the end of January, when they will have an updated quarterly forecast to guide their deliberations over when to raise the benchmark rate from its current setting of 0.25 per cent, a record low last touched during the Great Recession.

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Policy-makers pivoted from an emergency stance in October, abruptly ending their bond-buying program, while also advancing the timetable for the first rate increase to as early as April, compared with previous guidance signalling no changes would be considered until the second half of 2022.

But the data argue against a holding pattern for another seven weeks. (The next policy announcement is scheduled for Jan. 26.) The benchmark interest rate was 1.75 per cent when employment was last this high, and with employers advertising more than a million job vacancies, companies no longer need the incentive of ultra-low borrowing costs to hire and expand.

“Our recommendation to the Bank of Canada: Use Wednesday’s rate announcement … to telegraph a possible (read needed) normalization of monetary policy in the first quarter of the New Year, implementing the first of multiple interest rate hikes no later than March,” Lovely and Marion wrote.

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The jobless rate was 5.7 per cent in February 2020, and it averaged 5.7 per cent in 2019. Those rates were unusually low by recent historical standards, however; the average between January 2010 and December 2018 was seven per cent.

Still, you can quibble with the suggestion that Canada’s economy has arrived at full employment. There were few signs of inflation in 2019 when the jobless rate dropped to 5.4 per cent, the lowest on records that date to the early 1970s, suggesting the economy could run hotter than economists previously thought.

“Based on past economic cycles, we would have expected inflationary pressure to begin to rise,” Macklem said in February while reflecting on economic conditions ahead of the pandemic. “But inflation wasn’t threatening to take off. As the pandemic recedes and the recovery continues, we will keep that experience in mind.”

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Policy-makers no longer entirely trust the jobless rate as a signal of where prices are headed, and they now base their decisions on a dashboard of a few dozen employment indicators, including the “underutilization rate,” a hybrid indicator combining the total unemployed, the number of people who want a job but haven’t looked for one, and those who are employed, but working less than half of their usual hours. That measure dropped to 12.4 per cent in November from 13.1 per cent in October, and a peak of 36.1 per cent in April 2020. It was 11.4 per cent at the onset of the pandemic.

The granular data suggest Macklem hasn’t yet achieved the “complete” recovery the COVID-19 recovery he said he wanted. However, inflation is all anyone can talk about now, and all that chatter could become a self-fulfilling prophecy. The moment to test the definition of full employment probably has passed. “For a Canadian economy proving so resilient, with jobs so plentiful and inflation so elevated, the time is nigh for demand to be calmed,” Lovely and Marion said.

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