Canada’s low unemployment rate is not sustainable and is contributing to decades-high inflation, Bank of Canada governor Tiff Macklem said during a speech in downtown Toronto Thursday.
Speaking before students and researchers at Toronto Metropolitan University, the governor said the Canadian labour market needs to be rebalanced to stabilize inflation.
Macklem said businesses struggling to find workers can’t keep up with demand for goods and services in the economy.
“The tightness in the labour market is a symptom of the general imbalance between demand and supply that is fueling inflation and hurting all Canadians,” he said.
Last month, the Canadian economy surprised forecasters by adding more than 100,000 jobs while the unemployment rate held steady at 5.2 per cent. The strong job numbers came after four months of losses or little growth in employment.
Macklem said policies that increase the number of workers available to work would help ease inflation.
Increasing immigration is one of them, he said.
As economies around the world slow in response to rising interest rates, Macklem said Canada will fare better than other countries in part because of strong immigration levels.
Other polices such as the expansion of universal childcare will help increase the proportion of women in the workforce, he said, but noted it will take time.
The governor, however, stressed that these policies are not substitutes for using interest rates to clamp down on high inflation.
“New workers will have new incomes, and that will add to spending in the economy,” Macklem said. “That’s why increasing supply, while valuable, is not a substitute for using monetary policy.”
Last month, the Bank of Canada raised its key interest rate for a sixth consecutive time this year. The central bank has signalled it’s drawing closer to the end of what’s been one of the fastest rate hike cycles in its history.
Economists expect one or two more interest rate hikes are still to come.
The rate hikes are in response to inflation reaching the highest level seen in nearly four decades. In September, the inflation rate was 6.9 per cent, well above the central bank’s two per cent target. It has been steadily declining since reaching a high of 8.1 per cent in June.
This report by The Canadian Press was first published Nov. 9, 2022.