The tight labour market reflected in Statistics Canada’s latest jobs report means the Bank of Canada will need to stay “vigilant” with its interest rate hikes in order to rein in inflation, one economist says.

Veronica Clark, an economist with Citi, told BNN Bloomberg that the 5.1 per cent unemployment rate reported on Friday could contribute to inflation risk as employers offer higher pay to retain and attract talent.

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Clark said she thinks the Bank of Canada can still tame inflation, but it will mean another sharp central interest rate increase next week when the bank makes its final policy decision for the year.

“I think they need to ultimately be a bit more vigilant still than even the market is expecting,” Clark said in a Friday interview. She predicted a 50-basis-point hike on Dec. 7, and said she thinks the central bank will ultimately bring its central interest rate to about 4.75 per cent.

The November unemployment rate reported Friday in Statistics Canada’s labour force survey was lower than expectations by analysts, and Clark noted it’s lower than the pre-pandemic rate. The unemployment rate in November 2019 was 5.9 per cent, according to Statistics Canada.

A particularly tight labour market can create “upward pressure on wages,” she said, as employers offer more money to attract top candidates, which in turn can contribute to inflation.

Bank of Canada Governor Tiff Macklem has also said that the country’s low unemployment rate is contributing to inflation.

Wages were up 5.6 per cent in November compared with a year ago, a figure that Clark said could also guide the Bank of Canada’s policy decisions.

“It’s kind of telling you that maybe underlying wage and price pressures are right around five per cent, in which case interest rates need to get closer to that level also,” she said.

Wage growth has not kept up with inflation, however, which stood at a rate of 6.9 in October.

The economy added about 10,000 jobs in November, with employment rising in industries like finance, insurance, real estate and manufacturing, but dropping in construction and retail trade.

Clark said the drop in construction jobs is not surprising given its relationship to weaker housing market, but the overall jobs picture is “pretty positive,” especially with more people in full-time jobs. 

With files from The Canadian Press