Central bank deputy governor repeats suggestion rates will rise over medium term

OTTAWA – The Bank of Canada’s second in command is continuing to suggest that interest rates will rise over the medium term, even as economists say turmoil in Europe and a weak recovery in the U.S. are taking their toll on Canada.

In a speech in Winnipeg, deputy governor Tiff Macklem repeated Thursday an earlier statement by the central bank. Notes on the speech were released in Ottawa.

“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, consistent with achieving the two per cent inflation target over the medium term,” Macklem said.

“The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”

Last month, TD Bank estimated growth in the third quarter could drop to as low as one per cent, from 1.8 in the first two quarters of the year.

The downgrade came amid an environment of a weak global economy, record household debt in Canada and governments set to reduce spending in an effort to balance their budgets.

However, despite the statement by Macklem on Thursday and other recent comments by Bank of Canada governor Mark Carney, economists suggest the likelihood of the central bank actually hiking rates in the near future is near zero.

The Bank of Canada’s key policy rate has been set at one per cent for more than two years.

In his speech, Macklem said that while the challenge of the last five years has been to create good jobs, the challenge of the next five will be finding good workers.

He said businesses are already reporting difficulties in finding the right worker for vacancies, even though he concedes the relatively high 7.3 per cent unemployment rate suggests that there are still many Canadians looking for work.

With the economy expected to keep expanding and baby boomers moving into retirement, he says the issue will become more acute in the next few years.

“We are getting older, living longer and having few children. That means more workers retiring and fewer people to replace them,” Macklem said.

He said efforts must be made to increase the participation of Canada’s indigenous peoples, noting the Aboriginal population is growing faster and tends to be younger than the Canadian average.

Immigration is also critical for growth of the labour force, Macklem said.

And he said governments must reduce inter-provincial barriers, such as differences in occupational licensing, that mitigates against labour mobility.

Macklem said overall, Canada’s labour market has vastly improved since the 1970s and partly credits an extended period of low, stable and predictable inflation for creating conditions of confidence in the economy.

He also took pains to burst some myths that he says have circulated about Canada’s relatively strong job creation record since the 2008-09 recession.

While it’s true that few of the 770,000 new jobs created since the recession have been in the manufacturing sector, it is a myth that most are low-paying service jobs, he said.

About 90 per cent of the new jobs pay above-average wages in fields such as construction, utilities and health-care and in professional, scientific and technical services.