“Our assessment of labour market conditions and underlying capacity and inflationary pressures is now more difficult,” Schembri said in prepared remarks to the Canadian Association of Business Economics on Tuesday. “Consequently, more uncertainty exists around the timing of when the output gap will close and inflation will return sustainably to our 2 per cent target.”Article content
The remarks represent a reminder to markets that the path to normalization remains fundamentally unknown, contingent on the economic trajectory and health of the labour market. Governor Tiff Macklem gave a similar notice to global investors on Monday in an opinion piece for the Financial Times, when he pointed out that while the timing of the next rate hike is “getting closer” it will be dependent on economic outcomes.
Altogether, the Schembri and Macklem comments represent an effort by Bank of Canada officials to re-emphasize critical elements of their current forward guidance, which is not to raise interest rates before capacity is fully absorbed. The central bank’s decision last month to bring forward the timeline of possible interest rate increases was more hawkish than expected and caught some market players by surprise.
Canada will report inflation data for October on Wednesday. Economists are predicting annual inflation reached 4.7 per cent last month, which would match the highest level in three decades. Markets are currently anticipating the Bank of Canada will raise its benchmark overnight policy rate to 1.5 per cent over the next 12 months, from 0.25 per cent now. That would represent five rate hikes.