Wages Key to Pace of Bank of Canada’s Remaining Rate Hikes
The Bank of Canada is closely monitoring wages as it decides on the pace at which it will raise interest rates for the rest of the year. The central bank’s senior deputy governor, Carolyn Rogers, warned that a wage-price spiral could lead to entrenched inflation, where employers recoup higher labour costs by increasing prices.
A Record Level of Job Vacancies and Wages
Rogers noted that workers are taking advantage of a record level of job vacancies to demand salary increases that match the spike in living costs this year. This has raised concerns about a wage-price spiral, which could lead to inflation becoming entrenched in the economy.
The Labour Market: Tight But Loosening?
Following a speech by Rogers on September 8 in Calgary, it became clear that the labour market is tight and contributing to the central bank’s determination that demand has exceeded the economy’s ability to keep up with orders. This fuelled inflation, which clocked in at an annual rate of 7.6 per cent in July, slower than the previous month but still above the Bank of Canada’s two-per-cent target.
Workers’ Expectations and Wages
Rogers stated that workers are "looking at the rate of inflation and what it’s doing to their purchasing power, their budgets, and they’re looking at the same tight labour markets and they’re thinking ‘I need a raise.’" This emphasis on wages is crucial as the Bank of Canada aims to balance supply and demand in the economy, particularly in labour markets.
The Economy Slowing Down
There are signs that the economy is slowing down. The Canadian economy lost 40,000 jobs in August, causing the unemployment rate to rise to 5.4 per cent, a far cry from the 15,000 job gain expected by Bay Street economists. However, the average hourly wage rate rose 5.6 per cent from August 2021, faster than analysts anticipated.
Rogers’ Warning
Rogers warned that "entrenchment" of inflation expectations would be damaging to the economy and emphasized that it was not the central bank’s place to provide advice on setting wages. This follows controversy over comments by Bank of Canada Governor Macklem earlier this summer, which were interpreted as encouraging employers to suppress wages.
What’s Next?
The Bank of Canada will continue to monitor wages closely as it decides on interest rate hikes for the rest of the year. With the economy slowing down and signs of a downturn, the central bank aims to balance supply and demand in labour markets to take pressure off wages. As Rogers noted, "We’ll be watching wages closely… What we need is that supply and demand to come back in balance across the economy and particularly in labour markets."