Read full articleCIBC economists say that labour market indicators will be the key factor in terms of when the central bank decides to halt its tightening cycle and even potentially lower rates.
"For decades, the Bank largely ascribed accelerations or decelerations in trend inflation to whether real GDP would run above or below its estimate for Canada's non-inflationary potential: the so-called 'output gap'," the economists wrote. The economists wrote that measuring the output gap has always been challenging, but it became particularly difficult in 2021 when real GDP was still below pre-pandemic levels but labour markets were tight.
"All of this has meant that the starting point for the output gap, and subsequent growth rates, no longer gave stable guidance on whether the economy was overheating and likely to push inflation up or down. An inflation-targeting central bank, and financial market participants, needed a new signpost to follow."