Canada's Economy: Canadian Employment Boom Defies Forecasts, Puts BoC on the Spot Before Rate Decision

                                

How the hot labour market could affect the Bank of Canada's rate decision

The Bank of Canada is facing a dilemma as it prepares to announce its next interest-rate decision on Oct. 25. The Canadian economy is showing signs of strength, especially in the labour market, where job creation and wage growth are outpacing expectations. But this also means that inflationary pressures are building up, and the bank may need to act soon to keep them under control.

The latest employment report from Statistics Canada revealed that the economy added 64,000 jobs in September, far more than the 20,000 that analysts had predicted. The unemployment rate remained at 5.5 per cent, as more people entered the labour force. The report also showed that average hourly wages rose by 5 per cent year-over-year, matching the increases seen in July and August.

These numbers suggest that workers are benefiting from a tight labour market, where employers have to compete for talent and offer higher pay. This is good news for consumers, who have been coping with high inflation for the past two years. The consumer price index rose by 4.1 per cent in August, the highest annual rate since 2003.

But the strong labour market also poses a challenge for the Bank of Canada, which has a mandate to keep inflation within a target range of 1 to 3 per cent. 

However, some economists argue that the bank may need to act sooner, given the robust state of the labour market and the rising inflation. They point out that other central banks, such as the U.S. Federal Reserve and the Bank of England, have signalled that they are ready to tighten monetary policy in response to inflationary pressures. If the Bank of Canada lags behind, it could risk losing credibility and letting inflation expectations get out of hand.

On the other hand, some economists caution that raising rates too soon could derail the recovery, especially as some sectors of the economy are still struggling with pandemic-related disruptions and supply chain issues. They also note that some of the factors driving inflation, such as higher energy prices and supply bottlenecks, are likely to be temporary and ease over time.

The Bank of Canada will have to weigh these competing arguments carefully as it makes its next rate decision. It will also have to consider other economic indicators, such as GDP growth, consumer spending, business investment and housing activity. Whatever it decides, it will have to communicate clearly and convincingly to the public and the markets why it is taking or not taking action.