“There are three issues,” the man who would become Prime Minister Brian Mulroney told a roaring crowd in Nova Scotia 38 years ago. “The first is jobs, the second is jobs, and the third is jobs.”
After a decade fighting inflation and the high interest rates that required, the focus on “jobs, jobs, jobs” took Mulroney and his Progressive Conservative Party to a sweeping victory over the Liberals in the next year’s election.
Nearly four decades later, the Bank of Canada — and very likely Finance Minister Chrystia Freeland in her fiscal update next week — appear to agree that jobs and the economy are more important to Canadians than their fear of inflation.
Canadians like jobs and incomes
“It’s largely a good news story for many Canadians — many Canadians are getting jobs,” said Bank of Canada deputy governor Toni Gravelle, presenting the central bank’s economic progress report on Thursday to the Surrey Board of Trade in B.C.
“And them having jobs and incomes means there’s more demand for all the goods and all the businesses out there.”
Gravelle’s comments came in the context of an imminent decision by the federal government to renew the authority of the central bank to hold inflation within a target range by either raising or cutting interest rates.
Some analysts have said the fact that the government has delayed the decision so close to the January 2022 deadline, when the old mandate runs out, means the Liberals are considering making changes.
One possibility is that it could move toward U.S. rules, or the so-called dual mandate, which declares the central bank there must consider both the employment rate and inflation in making its interest rate decisions.
Critics fear such a move could confuse markets.
And the longer inflation is allowed to run hot, the more likely wage-earners and businesses would expect inflation to continue, thus pushing wages and prices even higher — something Gravelle said he wanted to avoid.
When asked directly by reporters whether the new mandate would include a provision on jobs, and whether there had been any disagreement between the bank and the government, Gravelle smiled and refused to be drawn.
But he did say that employment had become an important consideration in recent bank thinking.
“I won’t speak to the mandate question at all. I just wanted to highlight that in terms of our labour market discussions, it’s not really new that we talk about labour markets,” said Gravelle.
“I think the new part, in some respects, is that we’re looking at a vast array of indicators given that this … pandemic is quite unique and has generated a kind of a complex recovery — one that we’ve never seen before.”
Analysts who listened in on Gravelle’s speech, including TD economist Sri Thanabalasingam, describe him as taking a more “hawkish” point of view, meaning that he was in favour of cutting stimulus and raising interest rates more quickly than what was implied in Wednesday’s policy statement from the Bank of Canada.
Despite repeated worries about inflation, including a report out Thursday saying a Canadian family of four would likely pay $1,000 more for food next year, the Bank of Canada announced it would let things ride for a while yet.
But after hearing Gravelle’s remarks, Thanabalasingam said: “It appears the bank is setting the stage for more hawkish sentiment come January. Interest rate increases could follow soon after.”
Inflation risk remains
In responding to reporters’ questions, Gravelle, who sits on the governing council that makes interest rate decisions, admitted that the bank had become more focused on “upside risk” — meaning the risk of higher-than-expected inflation — because inflation was already so high.
“Because it is already above our one to three per cent range, we’re much more concerned,” he said.
Asked whether the Bank of Canada had abandoned the idea that inflation was transitory following U.S. Federal Reserve chair Jerome Powell’s declaration he was “retiring” the term, Gravelle insisted that whatever it is called, Canada’s central bank remains convinced current high levels of inflation will disappear by the end of 2022.
The deputy governor spent most of his speech reiterating the bank’s view that current inflation was not caused by rates that are too low but by distortions caused by the pandemic and its recovery. A consumer shift back to buying services, such as flights and restaurant meals, would relieve price pressure on physical goods, Gravelle said, and businesses would find ways to get the kinks out of supply chains.
It would just take time.
Waiting for Washington
If that does not happen, Gravelle insisted that the bank would use its tools — read interest-rate hikes — to pull inflation back down toward its two-per-cent target range.
But independent of any action by Ottawa to change the central bank’s mandate, Gravelle and his governing council have another constraint: Inflation is an international phenomenon.
Despite repeated insistence that it operates independently, the Bank of Canada simply cannot act alone to defeat what is a global problem. Hiking rates significantly before the U.S. central bank decides to do the same thing would distort the price of the loonie, and thus trade — without solving the problem.