Posted on July - 10 - 2010
Canada: no choice but to raise rates
This morning’s job report in Canada was very impressive. Not only did the Canadian job machine create 93K jobs in June, but the level of total employment reached its pre-recession peak. This is much more robust than its U.S. counterpart whose payroll remains 5.4% below its peak level. This shows a big cyclical difference between the current state of the Canadian labour market and the one in the U.S. What does this mean for monetary policy? Canada can no longer simply import U.S. monetary policy whose rates remain extremely expansionary. As today’s Hot Charts shows, the year-over-year growth rate in employment is now more than 2% in Canada.
Deep negative real policy rates helped restore domestic demand since the end of the recession. Now that the goal has been achieved, such a policy is no longer warranted. Although the tone of the latest press release by the Bank of Canada was particularly oriented toward the international situation, it is now time for the BoC to set policy based on domestic developments. An increase in rates in July is probably more than just in the cards. In our opinion, it is probably already a done deal.
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