Bank of Canada: the Economy Can Thrive and Create Employment Even If Inflation Declines

For the first time in over four years, the central bank reduced its key policy rate earlier this month. If inflation continues to demonstrate a sustainable trajectory toward the 2% target, additional reductions are anticipated.

Macklem informed the Winnipeg Chamber of Commerce that certain individuals, particularly younger workers and newcomers, were experiencing difficulty in securing employment.

"With some slack in the economy, there is room for the Canadian economy to grow and add more jobs even as inflation continues to move closer to the target," he indicated.

According to Macklem, the bank did not believe that a substantial increase in the unemployment rate was necessary to achieve the 2% inflation objective. He coined the term "soft-landing scenario" to describe this combination of factors.

"It has always been a narrow path and we have yet to fully stick the landing," according to him.

The federal government is reducing the number of individuals permitted to enter the country after the rate of immigration increased during the pandemic, which has resulted in increased population growth and accommodation costs. The fact that certain migrants are experiencing difficulty in securing employment could be beneficial.

"(This job search difficulty) suggests the government has some room to slow the growth of non-permanent residents without tightening the labor market too much and causing significant labor shortages," according to Macklem.

Macklem acknowledged that there were indications that wage growth was beginning to moderate, despite the bank's longstanding concerns regarding it.

He did not provide a timeline for potential future relaxations. Money markets anticipated a 73% likelihood of an additional 25 basis point reduction in July and a total of three additional reductions this year prior to his speech.

April saw the annual inflation rate decline to a three-year low of 2.7%, indicating the fourth consecutive month in a row that the rate was below 3%. The bank's fundamental inflation measures, which are closely monitored, also continued to decrease.

The May inflation data is scheduled to be released by Statistics Canada on June 25.

The BoC is expected to revise its economic forecasts in conjunction with its upcoming monetary policy decision on July 24.