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Bank of Canada Should Add Unemployment Rate to Its MPR, Says National Bank

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The Bank of Canada should add an unemployment rate forecast to its quarterly Monetary Policy Report, said National Bank of Canada.

The bank's case is straightforward and long-standing. Labor market slack is central to the inflation outlook; maximum sustainable employment is already part of the policy framework; the unemployment rate is well understood; and most peer central banks already publish such a forecast.

Understanding the labor market and having a view on its trajectory is vital for market watchers, stated National Bank. That's because for Canadian bond markets, no release is as impactful as the monthly Labour Force Survey (LFS), which includes a jobs tally and an unemployment rate, among other details.

Labor markets and inflation are inextricably linked, pointed out the bank. While the consumer price index data can tell you where inflation was, the trajectory of the job market helps inform where inflation is going. The post-pandemic revival of the Phillips curve underscores this.

In turn, this can help inform how the Bank of Canada's policy stance may evolve. So, even though it is widely understood that price stability is the BoC's primary mandate, it shouldn't come as a surprise that investors will recalibrate short- and medium-term rate expectations when marginal labor market data become available, added National Bank.

The BoC offering projections of the unemployment rate , alongside an estimate of the trend/natural unemployment rate, would not distract from its primary mandate, but it would enhance the market's understanding of how that mandate is likely to be pursued, according to the bank.

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Canada's Labor Market Shows Signs of Life in May, With A Strong Rebound in Job Creation, Says Desjardins

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