Canada decided in the early 1990s to use an inflation target to set interest rates.
But economists started to doubt the predictive power of the “Phillips curve” in the years that followed the Great Recession.
In Canada, the jobless rate dropped to a record low of 5.4 per cent in May 2019, and averaged 5.7 per cent throughout 2019, levels that would have triggered alarms at the central bank because the country’s jobless rate had rarely fallen below six per cent.
“The evidence for Canada indicates that the relationship between labour market conditions and inflationary pressure has weakened and become difficult to measure,” Lawrence Schembri, a deputy governor at the Bank of Canada, said in a virtual speech hosted by the Canadian Association of Business Economics on Nov.
Few of central banking’s closest observers will be surprised by those comments, as policy-makers have made clear in recent years that they were beginning to doubt previous definitions of full employment.
Schembri’s speech was originally scheduled for August, but the election call forced the Bank of Canada to postpone, as it has a policy of keeping quiet during campaigns for federal office.
Policy-makers had become highly distrustful of traditional indicators, and yet, instinctively, they would have sensed that the economy was a long way from full employment.
To be sure, the Bank of Canada decided to hedge that bet last month.
“Our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed,” Macklem said in an opinion piece for the Financial Times that was published Nov.
The central bank is watching almost 50 different employment gauges and only 20 of them have returned to pre-pandemic levels.
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