Bank of Canada Governor Tiff Macklem has reiterated his forecast for a soft landing for the Canadian economy, expecting a moderate rise in the unemployment rate without the need for a significant increase to achieve the central bank’s inflation target.
Speaking on Monday, Macklem noted that Canada’s unemployment rate, which reached 6.2% in May, is “just above” pre-pandemic levels. At that time, the labor market was near “maximum sustainable employment” — the highest level of employment an economy can sustain without triggering inflation.
“We continue to believe that we don’t need a significant rise in the unemployment rate to bring inflation back to our 2% target,” Macklem said in a speech delivered in Winnipeg.
Macklem highlighted that Canada’s labor market has become more balanced, making it harder to find new jobs. This difficulty is particularly impacting young workers and newcomers, who are experiencing rising unemployment rates faster than other Canadians.
The speech indicates that the Bank of Canada is increasingly confident that the labor market has adjusted enough to facilitate further cooling of inflation, even as the economy continues to grow and create jobs. Policymakers have suggested that further interest rate cuts are reasonable if price pressures continue to decline. Macklem pointed out that while wage growth remains above pre-pandemic levels, the balancing of the labor market and decreasing inflation are beginning to ease compensation pressures.
“Wages tend to lag behind adjustments in employment,” Macklem stated. “Moving forward, we will be looking for wage growth to moderate further.”
The faster increase in unemployment rates among newcomers provides Prime Minister Justin Trudeau’s government with “some room” to slow the growth of non-permanent residents without causing labor shortages or tightening the labor market, Macklem noted.
He also pointed out that recent immigrants and young people are more likely to be renters — a group facing increasing household financial stress.
Macklem emphasized that the labor market “overheated” following “exceptional” fiscal and monetary policy responses. This surge led to a spike in job vacancies, prompting the federal government to increase the number of newcomers entering the country.
However, job vacancies are now declining, a trend the Bank of Canada expects to continue, contributing to a further rise in the unemployment rate, as per policymakers’ analysis of the Beveridge curve.
In the long term, Macklem stressed the importance of continued investment in an inclusive labor market, “smart immigration,” and a “strong and accessible education system” to address Canada’s productivity challenges.
In June, the Bank of Canada was the first central bank among the Group of Seven to begin cutting interest rates, reducing its policy rate to 4.75%. The next rate-setting decision is scheduled for July 24.
Macklem will provide additional insights during a press conference at 3 p.m. Ottawa time.
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