Bank of Canada Governor Tiff Macklem has expressed optimism about the country’s economic outlook, suggesting that a significant rise in unemployment is not necessary to achieve the central bank’s inflation target. Speaking in Winnipeg on Monday, Macklem highlighted that Canada’s unemployment rate, which stood at 6.2% in May, is just above pre-pandemic levels when the labor market was near its maximum sustainable employment.
“We believe we can bring inflation back to the 2% target without a substantial increase in unemployment,” Macklem stated. He emphasized that while the labor market has loosened, making job searches more challenging—particularly for young workers and newcomers—the economy continues to expand and generate jobs.
Macklem’s comments signal growing confidence within the Bank of Canada that the labor market’s current state can help temper inflation without derailing economic growth. He indicated that further interest rate cuts could be on the horizon if inflationary pressures continue to subside.
“We aim to avoid overly restrictive monetary policy,” Macklem said. “However, we also don’t want to reduce borrowing costs too quickly and risk undermining progress on inflation.”
He noted that wage growth, though still above pre-pandemic levels, is beginning to moderate as the labor market rebalances and inflation eases. “Wages typically adjust slower than employment,” Macklem explained. “We expect wage growth to continue moderating.”
The governor also discussed the impact of immigration on the labor market, noting that the faster rise in unemployment rates among newcomers gives the federal government some leeway to slow the growth of non-permanent residents without exacerbating labor shortages. “There are limits to how quickly we can integrate people into the economy,” Macklem said, acknowledging that immigration has been a key driver of growth.
Macklem pointed out that recent immigrants and young people, who are often renters, face significant financial stress. He attributed the labor market’s “overheated” condition to exceptional fiscal and monetary responses during the pandemic, which increased job vacancies and led the federal government to boost immigration.
Job vacancies are now declining, a trend the Bank of Canada expects to continue, which will likely contribute to a gradual increase in the unemployment rate. This aligns with the policymakers’ analysis of the Beveridge curve, which illustrates the relationship between job vacancies and unemployment.
Looking ahead, Macklem stressed the importance of investing in an inclusive labor market, smart immigration policies, and a robust education system to address Canada’s productivity challenges. In June, the Bank of Canada became the first G7 central bank to lower interest rates, reducing its policy rate to 4.75%. The next rate decision is scheduled for July 24.
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