Wages Key to Pace of Bank of Canada’s Remaining Rate Hikes
The pace at which the Bank of Canada raises interest rates over the rest of the year may be determined by wages. This is according to a recent statement from Carolyn Rogers, senior deputy governor of the central bank.
A Wary Approach to Wage Increases
Bank of Canada officials are wary of a wage-price spiral, where workers take advantage of record levels of job vacancies to demand salary increases that match this year’s spike in the cost of living. This could lead to entrenched inflation, as employers seek to recoup higher labor costs by charging more for goods and services.
The Labor Market is Tight
Rogers described the labor market as tight, contributing to the central bank’s determination that demand has exceeded the economy’s ability to keep up with orders. This is fuelling inflation, which clocked in at an annual rate of 7.6 per cent in July, slower than the previous month but still well above the Bank of Canada’s two-per-cent target.
Workers are Looking for Raises
Rogers noted that workers are looking at the rate of inflation and what it’s doing to their purchasing power, their budgets, and they’re thinking ‘I need a raise.’ This is a sentiment that is being echoed by many Canadians, who are feeling the pinch of high inflation.
The Bank of Canada’s Strategy
Tiff Macklem, the governor of the Bank of Canada, has emphasized that it’s not the central bank’s place to provide advice on setting wages. However, he has also stated that employers should not build current rates of inflation into longer-term contracts or wage agreements.
A Slowdown in the Economy
There are signs that the economy is slowing down. The labor market loosened somewhat in August, as the Canadian economy lost 40,000 jobs, which caused the unemployment rate to rise to 5.4 per cent. However, the average hourly wage rate rose 5.6 per cent from August 2021, a faster pace than analysts expected.
Watching Wages Closely
Rogers has stated that the Bank of Canada will be watching wages closely. "What we need is that supply and demand to come back in balance across the economy and particularly in labor markets," he said. "That’ll take the pressure off wages."
The Importance of Wage Increases
Wage increases are a key factor in determining the pace at which interest rates rise. If wages continue to rise, it could put upward pressure on inflation, leading the Bank of Canada to raise interest rates further.
A Balanced Economy
Rogers emphasized that what’s needed is for supply and demand to come back into balance across the economy, particularly in labor markets. This will help take the pressure off wages and ensure that inflation comes down.
Conclusion
The pace at which the Bank of Canada raises interest rates over the rest of the year may be determined by wages. The central bank will be watching wages closely, as they are a key factor in determining the pace at which interest rates rise. A balanced economy is essential for keeping inflation under control, and this requires supply and demand to come back into balance across the economy.
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