Most of Bank of Canada Deputy Governor Nicolas Vincent's Tuesday speech in Quebec was devoted to highlighting the weakness in the country's labor market, including the 'low-hire, low-fire nature', the elevated youth unemployment and the record average length of joblessness amongst those looking for work, said Royce Mendes over at Desjardins.
But all of that is well known among market participants, and the most relevant takeaway from the speech focused on the BoC's reaction function to this weakness, he added.
Monetary policymakers see much of the labor market slack as being part of a broader structural change within the economy, said Mendes, noting that Vincent said "while monetary policy can, to some extent, help the economy transition during periods of restructuring, it cannot compensate for lower supply caused by factors such as trade friction or population aging."
Vincent, Mendes also noted, added, "if we were to stimulate demand when the issue is more structural, we could create inflationary pressures while also delaying necessary restructuring in the economy." Those are sentiments BoC Governor Tiff Macklem has conveyed before.
The view of Desjardins is similarly nuanced. If structural change, such as the trade friction with the United States lowers productivity, and by extension lowers investment and raises savings, then a lower equilibrium interest rate may be necessary in the short-term to prevent economic slack from accumulating, Mendes said. "In other words, lower rates wouldn't be stimulating the economy as they would simply be stemming the bleeding."
That said, as Vincent points out, policymakers need to be careful when measuring the appropriate dose, Mendes said. Although markets are preoccupied with the inflationary fallout from the conflict in the Middle East, this debate could become more of a focus should oil prices continue to slide, it added.