Show Transcript
The Bank of Canada now has an expanded mandate that includes keeping an eye on the job market. Anthony Okolie speaks with James Orlando, Senior Economist, TD Bank, about the year ahead and how the Omicron variant could impact its outlook in 2022.
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[MUSIC PLAYING]
- Well, the Bank of Canada made headlines in late December when its updated mandate was announced. James, what's different in this new directive?
- Yeah, so in Canada, we have what we call inflation targeting. And that's the business The Bank of Canada is in. It's their main priority. It's been their priority for about 30 years now.
So since 1991, the Bank Canada said that we want to make sure inflation stays around 2% within a range of about 1% to 3%. Now, going into this mandate renewal, there was debate about how the Bank of Canada's mandate might change. There's debate about, should they focus on things like employment? Should they focus on factors like housing?
They didn't specifically change any of the main mandate. But what they're saying is they're going to consider other factors that are going on in the economy. But the main priority, the business that they're in, is still going to be focusing on inflation and make sure we get price stability in Canada.
OK, so given this new sort of focus on employment in their mandate, where does Canada's job market stand today, especially with the rise of the Omicron variant?
- Well, heading into before Omicron became a big concern in Canada, we were-- the Canadian economy, Canadian Labor market, was doing amazingly well. When it comes to looking at how we're doing on unemployment, the way we think about it is we want to figure out how many Canadians have jobs. And there's more people in Canada working right now than before the pandemic.
The number of people that were-- that are even in the labor force has increased. We have almost 80% participation of people within that working age group, age cohort that we have. And that's huge. That's one of the highest in the developing world, highest in Canadian history.
So the employment situation in Canada is great. So if the Bank of Canada wants to consider-- obviously, not an official requirement-- but just consider how we're doing on the employment front, everything is looking pretty great right now.
Obviously, Omicron presents a huge risk. We're having lockdowns in Canada. We're having restrictions. And naturally, that's going to have an impact on the employment growth, especially for the month of December, which we're going to get data soon on. But also in January, because we've seen the restrictions start playing in Canada right now.
But what we've noticed in the past is that those restrictions, yes, they come in, yes, it's an impact during that time period. But the bounce back is strong. The bounce back has been consistently strong.
As Canadians within the labor market, employers, the resiliency is high. So we would expect a strong bounce back once these restrictions are lifted.
And what about the Canadian housing market? Obviously, 2021 was a very strong year for the Canadian housing. But what impact will this new mandate have on the sector going forward?
- Yeah, so definitely housing the top of mind for almost all Canadians, top of mind for the Bank of Canada. We're in a situation where we're looking abroad. And we're seeing that some other central banks are starting to consider housing when it comes to how they conduct monetary policy. So if housing starts going up a lot in prices, what other economies are doing, what other central banks are doing is they're raising interest rates into that.
Now, in Canada, what the Bank of Canada is doing is they're saying, OK, you know what? We're not best suited to manage that risk. That's going to be something such as we call macroprudential policy. So the government of Canada stepping in to adjust policies to make it a little bit more difficult to get a high mortgage level.
Now, this is something we've seen happen. We've seen with the B20. We've seen tons of restrictions come into play in Canada that were supposed to limit housing market froth. And Canada's saying, this is how we're going to go forward with it.
For the housing market in particular, what we know and what we learned over 2020, 2021, is that interest rates do matter. And the Bank of Canada sets interest rates. So we're in a situation where the Bank of Canada is going to be looking for the government to actually restrict housing market froth as we go to 2022.
But they're going to have a huge say over how things really go. So what interest rates are going to be over 2022 is probably going to have more of a say over near-term housing market then maybe this mandate change will be.
OK, so let's turn to interest rates, as you mentioned. Last year, of course, the Bank of Canada moved up their timeline for interest rate hikes this year. Now, given a spike in Omicron cases, when do you anticipate we can see the first rate hike in Canada?
- Yeah, so my view is that the Omicron setback that we're having right now isn't going to delay the Bank of Canada at all. We think that yes, there's going to be a slowdown in economic growth, maybe a little bit of slowdown in labor market.
But because I mentioned earlier, that bounce back is going to be strong. And that's going to set the Bank of Canada up for interest rate hikes within the coming months. It's going to be happening pretty soon.
As I mentioned, even before Omicron, we were looking really great on the employment front. That's something the Bank of Canada's considering. Housing market-- there's froth there. We know higher interest rates are needed to make sure that a repeat of 2021 double digit house prices doesn't actually happen in 2022.
Not to mention the elephant in the room, which is high inflation. We mentioned that the Bank of Canada is looking for 2% inflation with the 1% to 3% target. We're above that right now.
So the Bank Canada is recognizing this. And honestly, Omicron, any sort of slowdown in economic growth, any sort of restrictions, any sort of supply chain impacts-- all of that's going to even make inflation remain more elevated for even longer. So my view is that we're going to have to have higher interest rates probably coming within the coming months.
And we're going to start that interest rate cycle. So expect higher policy rates. Expect higher bond yields. Expect higher mortgage rates over 2022.
- And James, as we head into the new year, you know, besides the variant, which you mentioned and inflation, what are some of the key risks to the Bank of Canada's outlook in the near term?
- Yeah, I think the first two you hit right on the head there. So inflation is a big one. We have high inflation in Canada, uncomfortably high. You know, that pinches the pennies or the wallets of Canadians.
And we need to make sure that Canadians-- like, the price stability is apparent in Canada. Because when prices rise, and say, wages don't keep up with pricing, that starts impacting consumer spending. And we need to make sure consumers are doing pretty well. That's the engine of growth in Canada.
The other thing is, we're going to be looking at potentially a slowdown in Omicron. Although right now, my baseline is not that we're going to have a significant impact. You know, things could get disorderly pretty quick. And we're seeing how high cases are right now.
So those are definitely a big risks. Obviously, housing is a big one. That's one of your big ones, where we think that the financial imbalances that come from high house prices, the increased mortgages that people are taking out to be able to just buy a house, a place to live-- that is a huge risk for not just the current quarters, the current months, but also in the future.
So these are all things we're watching for. We're heading into this year on a pretty good footing. So the Canadian economy is pretty much almost fully recovered from the pandemic. But we have all these risks that are coming in. And we just need to make sure we stay the course, make sure that things are-- that spending is maintained, the GDP growth, that the employment momentum that we have going is maintained.
We're going to have some setbacks. We look at even financial markets. Valuations are very high right now. We haven't had a pullback in financial markets since the pandemic started.
It's a very long period of time without having sometimes even just a little healthy a little bit of correction right now. And so we might get a little bit of that financial market volatility this year. It's all about how quickly we're able to bounce back from that sort of thing. So these are the things that we're watching out for, for the next year.
- James, Thank you very much for joining us.
- Thank you.
[MUSIC PLAYING]
- Well, the Bank of Canada made headlines in late December when its updated mandate was announced. James, what's different in this new directive?
- Yeah, so in Canada, we have what we call inflation targeting. And that's the business The Bank of Canada is in. It's their main priority. It's been their priority for about 30 years now.
So since 1991, the Bank Canada said that we want to make sure inflation stays around 2% within a range of about 1% to 3%. Now, going into this mandate renewal, there was debate about how the Bank of Canada's mandate might change. There's debate about, should they focus on things like employment? Should they focus on factors like housing?
They didn't specifically change any of the main mandate. But what they're saying is they're going to consider other factors that are going on in the economy. But the main priority, the business that they're in, is still going to be focusing on inflation and make sure we get price stability in Canada.
OK, so given this new sort of focus on employment in their mandate, where does Canada's job market stand today, especially with the rise of the Omicron variant?
- Well, heading into before Omicron became a big concern in Canada, we were-- the Canadian economy, Canadian Labor market, was doing amazingly well. When it comes to looking at how we're doing on unemployment, the way we think about it is we want to figure out how many Canadians have jobs. And there's more people in Canada working right now than before the pandemic.
The number of people that were-- that are even in the labor force has increased. We have almost 80% participation of people within that working age group, age cohort that we have. And that's huge. That's one of the highest in the developing world, highest in Canadian history.
So the employment situation in Canada is great. So if the Bank of Canada wants to consider-- obviously, not an official requirement-- but just consider how we're doing on the employment front, everything is looking pretty great right now.
Obviously, Omicron presents a huge risk. We're having lockdowns in Canada. We're having restrictions. And naturally, that's going to have an impact on the employment growth, especially for the month of December, which we're going to get data soon on. But also in January, because we've seen the restrictions start playing in Canada right now.
But what we've noticed in the past is that those restrictions, yes, they come in, yes, it's an impact during that time period. But the bounce back is strong. The bounce back has been consistently strong.
As Canadians within the labor market, employers, the resiliency is high. So we would expect a strong bounce back once these restrictions are lifted.
And what about the Canadian housing market? Obviously, 2021 was a very strong year for the Canadian housing. But what impact will this new mandate have on the sector going forward?
- Yeah, so definitely housing the top of mind for almost all Canadians, top of mind for the Bank of Canada. We're in a situation where we're looking abroad. And we're seeing that some other central banks are starting to consider housing when it comes to how they conduct monetary policy. So if housing starts going up a lot in prices, what other economies are doing, what other central banks are doing is they're raising interest rates into that.
Now, in Canada, what the Bank of Canada is doing is they're saying, OK, you know what? We're not best suited to manage that risk. That's going to be something such as we call macroprudential policy. So the government of Canada stepping in to adjust policies to make it a little bit more difficult to get a high mortgage level.
Now, this is something we've seen happen. We've seen with the B20. We've seen tons of restrictions come into play in Canada that were supposed to limit housing market froth. And Canada's saying, this is how we're going to go forward with it.
For the housing market in particular, what we know and what we learned over 2020, 2021, is that interest rates do matter. And the Bank of Canada sets interest rates. So we're in a situation where the Bank of Canada is going to be looking for the government to actually restrict housing market froth as we go to 2022.
But they're going to have a huge say over how things really go. So what interest rates are going to be over 2022 is probably going to have more of a say over near-term housing market then maybe this mandate change will be.
OK, so let's turn to interest rates, as you mentioned. Last year, of course, the Bank of Canada moved up their timeline for interest rate hikes this year. Now, given a spike in Omicron cases, when do you anticipate we can see the first rate hike in Canada?
- Yeah, so my view is that the Omicron setback that we're having right now isn't going to delay the Bank of Canada at all. We think that yes, there's going to be a slowdown in economic growth, maybe a little bit of slowdown in labor market.
But because I mentioned earlier, that bounce back is going to be strong. And that's going to set the Bank of Canada up for interest rate hikes within the coming months. It's going to be happening pretty soon.
As I mentioned, even before Omicron, we were looking really great on the employment front. That's something the Bank of Canada's considering. Housing market-- there's froth there. We know higher interest rates are needed to make sure that a repeat of 2021 double digit house prices doesn't actually happen in 2022.
Not to mention the elephant in the room, which is high inflation. We mentioned that the Bank of Canada is looking for 2% inflation with the 1% to 3% target. We're above that right now.
So the Bank Canada is recognizing this. And honestly, Omicron, any sort of slowdown in economic growth, any sort of restrictions, any sort of supply chain impacts-- all of that's going to even make inflation remain more elevated for even longer. So my view is that we're going to have to have higher interest rates probably coming within the coming months.
And we're going to start that interest rate cycle. So expect higher policy rates. Expect higher bond yields. Expect higher mortgage rates over 2022.
- And James, as we head into the new year, you know, besides the variant, which you mentioned and inflation, what are some of the key risks to the Bank of Canada's outlook in the near term?
- Yeah, I think the first two you hit right on the head there. So inflation is a big one. We have high inflation in Canada, uncomfortably high. You know, that pinches the pennies or the wallets of Canadians.
And we need to make sure that Canadians-- like, the price stability is apparent in Canada. Because when prices rise, and say, wages don't keep up with pricing, that starts impacting consumer spending. And we need to make sure consumers are doing pretty well. That's the engine of growth in Canada.
The other thing is, we're going to be looking at potentially a slowdown in Omicron. Although right now, my baseline is not that we're going to have a significant impact. You know, things could get disorderly pretty quick. And we're seeing how high cases are right now.
So those are definitely a big risks. Obviously, housing is a big one. That's one of your big ones, where we think that the financial imbalances that come from high house prices, the increased mortgages that people are taking out to be able to just buy a house, a place to live-- that is a huge risk for not just the current quarters, the current months, but also in the future.
So these are all things we're watching for. We're heading into this year on a pretty good footing. So the Canadian economy is pretty much almost fully recovered from the pandemic. But we have all these risks that are coming in. And we just need to make sure we stay the course, make sure that things are-- that spending is maintained, the GDP growth, that the employment momentum that we have going is maintained.
We're going to have some setbacks. We look at even financial markets. Valuations are very high right now. We haven't had a pullback in financial markets since the pandemic started.
It's a very long period of time without having sometimes even just a little healthy a little bit of correction right now. And so we might get a little bit of that financial market volatility this year. It's all about how quickly we're able to bounce back from that sort of thing. So these are the things that we're watching out for, for the next year.
- James, Thank you very much for joining us.
- Thank you.
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