Bank of Canada chief warns of unreasonable assumptions in housing prices
Bank of Canada Governor Tiff Macklem indicated he plans to maintain plenty of stimulus in the economy well into a strong labor market recovery.
In a virtual speech Tuesday, Macklem highlighted the damage COVID-19 has done to certain segments of the jobs market, particularly youth and women, saying it’s necessary for the bank to continue providing support.
“With a complete recovery still a long way off, monetary policy will need to provide stimulus for a considerable period,” Macklem said in prepared remarks Tuesday to the Edmonton and Calgary chambers of commerce. “The economy will need support for quite some time, and the Bank will continue to do its part.”
Last year, the Bank of Canada lowered its main policy interest rate to 0.25 per cent and introduced a large-scale asset purchase program to keep borrowing costs low for households and businesses. While the Bank of Canada has committed to keeping rates low until inflation is sustainably at its 2 per cent target, Macklem acknowledged this won’t happen without a full recovery in the labor market.
Macklem laid out a number of labor market reasons why policy needs to remain accommodative for a prolonged period. This includes helping foster the immediate rebound in employment, limit scarring effects of long-termed unemployment and facilitate what appears to be a Covid-driven acceleration in digitalization.
In another dovish comment, Macklem noted how there was little sign of inflation just before the pandemic despite unemployment at 40-year lows at the time.
“As the pandemic recedes and the recovery continues, we will keep that experience in mind,” Macklem said. “Monetary policy can continue to support demand in order to minimize scarring and bring as many people into the work force as possible.”
Macklem reiterated the bank’s latest forecast doesn’t anticipate slack to be fully absorbed until 2023. At the same time, structural changes will force reshape in some segments of the jobs market. The need to make up some of the lost economic potential means that Canada may be in store for an “even more” protracted recuperation period, he said.
Canada’s labor market recovered swiftly in the immediate aftermath of the pandemic but has now begun to reverse course amid winter lockdowns. The nation still has more than 850,000 jobs to recover from pre-pandemic levels.
Youth and women have been disproportionately hit hard from the losses because they often work in the lower waged jobs that have been most impacted by the lockdowns. The pandemic will also disrupt the labor market through increased automation and digitalization, Macklem said, adding it will be important for all levers of public policy to play a role in facilitating a recovery.
“We all have a role to play to ensure the recovery is broad-based and sustained, with the benefits shared widely,” he said.