Bank of Canada Leaves Expectations For 2022 Rate Hikes Intact

General Mark Goode 9 Dec

The Bank of Canada decided to keep its target for the overnight rate at 0.25%, in line with forecasts and to maintain its forward guidance, which sees a rise in the overnight rate sometime in the middle quarters of 2022. Until then, policymakers vowed to provide an adequate degree of monetary stimulus to support Canada’s economy and achieve the inflation target of 2%. On the price front, the ongoing supply disruptions continue to support high inflation rates, but gasoline prices, which have been a significant upside risk factor, have recently declined. Still, the BoC expects inflation to remain elevated in the first half of 2022 and ease towards 2% in the second half of the year. Finally, recent economic indicators suggested the economy had considerable momentum in Q4, namely in the labour and housing markets. Still, the omicron variant of the coronavirus and the devastation left by the floods in British Columbia has added to downside risks.

The Bank’s press release went on to say, “The Governing Council judges that in view of ongoing excess capacity, the economy continues to require considerable monetary policy support. We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s October projection, this happens sometime in the middle quarters of 2022. We will provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target.”

In October, the Bank ended its bond-buying program and is now in its reinvestment stage. It maintains its Government of Canada bonds holdings by replacing securities as they mature.

Bottom Line

Traders continue to bet that the Bank of Canada will hike interest rates by 25 basis points five times next year. This would take the overnight rate from 0.25% to 1.5%. I think this might be overly hawkish, expecting a more cautious stance of three rate hikes next year to a year-end level of 1.0%. This expectation has already had an impact on economic activity. According to local real estate boards reporting in the past week, November home sales were boosted by buyers hoping to lock in mortgage rates before they rise further next year.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Another Blockbuster Jobs Report in November

General Mark Goode 9 Dec


Statistics Canada released the November Labour Force Survey this morning, reporting employment gains of 153,700 last month–four times bigger than expectations. The unemployment rate fell to 6% from the 6.7% rate posted in October and is only 0.3 percentage points above the 5.7% rate posted in February 2020 before the pandemic began. This, along with the solid third-quarter GDP report released earlier this week, locks in expectations for a Bank of Canada interest rate hike next year.

Employment is now 186,000 jobs above pre-Covid levels. November’s report marks the sixth straight month of job gains. Markets are already pricing in five Bank of Canada interest rate hikes next year.

Employment increased in both the services-producing and goods-producing sectors in November. Both full-time (+80,000; +0.5%) and part-time (+74,000; +2.1%) work increased, and employment gains were spread across six provinces.

Total hours worked increased 0.7% and returned to the pre-pandemic February 2020 level for the first time. Hours rose across most industries, led by manufacturing, wholesale and retail trade, and construction. Despite increasing in November, hours in the goods-producing sector were still below their pre-pandemic level (-3.6%). All of the growth compared with February 2020 was in the services-producing sector (+1.3%), most notably in professional scientific and technical services (+12.5%).

Record high employment rate among core-aged women

More than 8 in 10 (80.7%) core-aged women aged 25 to 54 were employed in November, the highest employment rate recorded since comparable data became available in 1976 and 1.0 percentage points higher than in February 2020. In November, employment among core-aged women grew 66,000 (+1.1%), primarily in full-time work (+47,000; +0.9%), with growth spread across several industries.

Employment rose by 48,000 (+0.7%) among core-aged men in November, with gains entirely in full-time work. The employment rate for men aged 25 to 54 increased 0.5 percentage points to 87.1%, which is on par with the recent high in September 2019, and 0.5 percentage points higher than in February 2020.



Unemployment rate declined for the sixth consecutive month

The unemployment rate fell 0.7 percentage points to 6.0% in November. This was the sixth straight monthly drop and the most significant decline since March 2021. Before the pandemic, the unemployment rate had hit a record low of 5.4% in May 2019 and was 5.7% in February 2020.

First decline in long-term unemployment since August

The number of Canadians unemployed for 27 weeks or more fell 62,000 (-16.2%) in November, the first monthly decline in long-term unemployment since August 2021. Long-term unemployment fell more for women (-43,000; -24.2%) than for men (-19,000; -9.4%), with the decline spread across the core-aged and 55 and older age groups. The decline was particularly sharp for those who had been unemployed for 52 weeks or more (-56,000; -23.4%).

Long-term unemployment as a proportion of total unemployment fell 2.2 percentage points to 25.6% in November, following four months of little change. The share remained elevated compared with the level of 15.6% observed before the pandemic.




Wage rates rise 5.2% over two years after adjusting for employment composition

Average hourly wages were 5.2% higher (+$1.46 to $29.57) in November 2021 compared with two years earlier, controlling for the unprecedented changes in the composition of employment since February 2020. The October CPI indicated an increase of 5.3% from two years earlier. In comparison, fixed-weighted average wages had increased 5.1% from October 2019 to October 2021, or 7.5%, without controlling for composition changes.

Not surprisingly, wages increased more for recent hires than for established employees. The record-high job vacancies in September have continued to focus attention on the question of whether employers in some industries might raise wages to address recruitment and retention challenges. Average wages increased faster for new employees than for employees who have been in their current job for 18 months or longer.

Bottom Line 

When the Bank announces its policy decision next week, Governor Macklem will undoubtedly confirm that the economy has bounced back from its Q2 weakness. Though the omicron variant has increased uncertainty regarding the pandemic outlook, the economy is rapidly approaching full employment. Moreover, as inflation remains well above target and wage pressures are mounting, the Bank will be mindful of its commitment to normalize interest rates next year. If anything, today’s labour market report may accelerate expectations for a BoC rate hike to the first quarter of next year rather than the second.

Dr. Sherry Copper

Chief Economist, DLC