Macklem Reiterates Bank of Canada May Reduce Stimulus

Bank of Canada Senior Deputy Governor Tiff Macklem reiterated policy makers may withdraw monetary stimulus as the economy recovers, and that some slack remains in the labor market.

“To the extent that the economic expansion continues and the excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” Macklem said in a speech today in Winnipeg, Manitoba.

The benchmark interest rate has been 1 percent for more than two years, the longest pause since the 1950s. The central bank has indicated since April it may raise borrowing costs, and in July forecast the economy may reach full capacity in the second half of next year. Other central bankers have added stimulus this year to boost growth, including asset purchases by the U.S. Federal Reserve.

Canada’s dollar appreciated 0.6 percent to 98.16 cents per U.S. dollar at 10:58 a.m. in Toronto. It touched 98.84 cents yesterday, the weakest level since Sept. 6. One Canadian dollar buys $1.0191. Government bonds fell today, pushing benchmark five-year yields three basis points higher to 1.31 percent. The price of the 1.5 percent security due September 2017 fell 14 cents to C$100.91.

Trading in overnight index swaps shows investors have priced in just two basis points of interest rate increases through July.

Labor Market

Most of Macklem’s speech focused on Canada’s labor market, which he said recovered quickly after the recession that ended in mid-2009.

“Nevertheless, some slack remains and can be expected to persist in the near term,” he said, citing “modest” wage growth and a jobless rate above the average of the past decade. He didn’t give a time frame for reaching full employment.

Statistics Canada tomorrow may report that the unemployment rate was unchanged at 7.3 percent for a third month according to economists surveyed by Bloomberg, who also forecast it will exceed 7 percent through next year.

Canada has gained 339,000 jobs since recouping the 430,000 jobs lost in the last recession, Macklem said.

The country’s aging population means Canada will experience labor shortages in the future, he said. Steps to alleviate that including boosting productivity, more immigration and expanding opportunities for the country’s aboriginal population where unemployment is high, Macklem said.

Business Investment

“With a persistently strong Canadian dollar, a widening competitiveness gap, low interest rates, strong balance sheets and increasing labor scarcity on the horizon, the imperative for Canadian businesses to invest in M&E has rarely been more compelling,” Macklem said, referring to machinery and equipment.

“Recent investment performance has been solid but not spectacular,” Macklem said. “We must do better than solid.”

While answering questions following the speech, he said that besides investing more, businesses must refocus their plans on faster-growing emerging markets, particularly in Asia.

“Our share of those markets has been declining,” Macklem said. “We need a bigger part of the growing market.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE