The BoC Is Waiting For Full Employment To Raise Rates. Banks Say Canada Is Past That

Canada’s central bank renewed its mandate, but with one fundamental change. The Bank of Canada (BoC) will now consider employment in addition to its goal of maintaining a 2% rate of inflation. The Governor stressed, it’s difficult to figure out when full employment is present. Two of Canada’s “Big Six” banks say full employment has already occurred, so they’re good to go. Probably not what the BoC was expecting. 

What Is Full Employment?

Full employment is the rate where employment is at maximum efficiency. It doesn’t mean the unemployment rate is near zero, like many people assume. People will always be unemployed, and it’s not always a bad thing (i.e., career change, upgrading jobs, etc.). Full employment is when the job market is so tight it creates inflation. It’s sometimes called the non-accelerating inflation rate of unemployment (NAIRU). 

Bank of Canada To Consider Employment When Setting Rates

The BoC struggled to define full employment, but they did confirm they believe it’s NAIRU. Though they couldn’t explain what the employment rate should be, how they’ll measure it, or its importance. They stress that uncertainty in recognizing full employment means they’ll stay flexible. Higher levels of inflation will be tolerable until the goal is achieved. Just to reiterate, they’ll exercise easy policy until a goal that’s difficult to define is achieved. Okay…

Canada’s Biggest Banks Says “Mission Accomplished” On Full Employment

BMO chief economist Douglas Porter said, “mission accomplished” because they already hit full employment. His analysis shows prime-aged (15-64) workers’ employment rate is at a record high. The rate is “easily” past pre-pandemic levels. At the start of 2020, the Canadian economy was also considered robust. By no measure is this a weak employment market. 

“Hence, alongside a 6% jobless rate, and 1 million job vacancies, it would seem that the labor market presents precisely zero blockage to the Bank from doing what it needs to do on the inflation front at this moment,” he said. 

BMO isn’t alone on this one. National Bank of Canada shared a similar opinion earlier in the month. “Let us be blunt: Having achieved full employment, Canada no longer requires extraordinarily stimulative monetary policy,” said the bank’s economist. 

“… maintaining such a loose policy standing much longer risks compromising Canada’s longer-term economic and financial market prospects.” 

National Bank economists say central bank research shows Canada is past full employment. “The national unemployment [rate] is back down to 6% — a level that would have been considered at or perhaps below NAIRU in pre-COVID days, as per Bank of Canada published research.” 

Either the central bank doesn’t understand its research or has a green light to raise rates. The latter would be a much more hawkish situation than the market currently expects.