Economic data is likely to send "conflicting signals" to the central bank in the near future
In future policy rate decisions, the Bank of Canada will likely focus on labour market indicators rather than on economic activity or inflation levels, according to Avery Shenfeld of CIBC Capital Markets.
This is because barring the possibility of an economic crash or boom, “it’s almost inevitable that economic data will send conflicting signals about growth and inflation in the coming months,” Shenfeld said. “Those who think ‘inflation targeting’ implies an obsession with every tick in the [consumer price index] don’t really understand the bank’s process.”
A major driver of the central bank’s approach is the fact that the Canadian economy has yet to regain its pre-pandemic trend line due to multiple global and domestic pressures affecting output per employee, Shenfeld said.
“We could see real GDP surprise to the upside if some of the supply barriers improve and thereby enhance productivity, and that wouldn’t entail greater pressure on prices,” the economist outlined. “The bank would at some point reduce its estimate of supply headwinds, but you would only see that well after the GDP data came out. So real GDP could be a poor guide as a predictor of monetary policy.”
Some of the recent strength in wage growth might actually represent a “lagging response” to earlier surges in economic data, Shenfeld added.
“As in the US, Canadian wage rates first escalated at unemployment rates not far from levels that were not inflationary in the past, owing to higher-than-normal numbers of job vacancies,” Shenfeld said.
“The bottom line is that a combination of the unemployment rate, the number of unfilled jobs, and total hours worked will likely be the best predictor of whether the BoC can maintain its conditional pause.”
