Canada's central bank appears more concerned with job creation than about inflation

"There are three issues," the man who would become Prime Minister Brian Mulroneytold a roaring crowdin Nova Scotia38 years ago. "The first is jobs,the second is jobs,and the third is jobs."

After a decade fighting inflation and the high interest rates thatrequired, the focus on "jobs, jobs, jobs" took Mulroney and his Progressive Conservative Party to a sweeping victory over the Liberals in the next year's election.

Nearly fourdecades later, the Bank of Canadaand very likely Finance Minister Chrystia Freeland in her fiscal update next weekappear toagree thatjobs and the economy are more important to Canadians than their fearof inflation.

Canadians like jobs and incomes

"It's largely a good news story for many Canadiansmany Canadians are getting jobs," said Bank of Canada deputy governor Toni Gravelle, presenting the central bank's economic progress reporton Thursday to the Surrey Board of Trade in B.C.

"And them having jobs and incomes means there's more demand for all the goods and all the businesses out there."

Gravelle's comments came in the context of an imminent decision by the federal government to renew the authority of the central bank to hold inflation within a target range by either raising or cutting interest rates.

Some analysts have said the fact that the government has delayed the decision so close to the January 2022 deadline, when the old mandate runs out, means the Liberals are considering making changes.

One possibility is that it could move toward U.S.rules, orthe so-called dual mandate, which declaresthe central bank there must consider both the employment rate andinflation in making its interest rate decisions.

Critics fear such a move could confuse markets.

And the longer inflation is allowed to run hot, the more likely wage-earners and businesses would expect inflation to continue, thus pushing wages and prices even highersomething Gravelle said he wanted to avoid.

When asked directly by reporterswhether the new mandate would include a provision on jobs, and whether there had been any disagreement between the bank and the government, Gravelle smiled and refused to be drawn.

But he did say that employment had become an important consideration in recent bank thinking.

"I won't speak to the mandate question at all.I just wanted to highlight that in terms of our labour market discussions, it's not really new that we talk about labour markets," said Gravelle.

"I think the new part, in some respects, is that we're looking at a vast array of indicators given that this pandemic is quite unique and has generated a kind of acomplex recovery one that we've never seen before."

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Canada's Food Price Guide, an annual report published by Dalhousie University and the University of Guelph, suggests that next year could see the biggest annual increase in food bills on record. Sylvain Charlebois is the chief researcher on the report and a professor studying food distribution and security at Dalhousie University in Halifax.

Analysts who listened in on Gravelle's speech, including TD economist Sri Thanabalasingam, describe him as taking a more "hawkish" point of view, meaning that he was in favour of cutting stimulus and raising interest rates more quickly thanwhat was implied in Wednesday's policy statement from the Bank of Canada.

Despite repeated worries about inflation, including areport out Thursday saying a Canadian family of four would likely pay $1,000 more for food next year, the Bank of Canada announced it would let things ride for a while yet.

But after hearing Gravelle's remarks, Thanabalasingamsaid:"It appears the bank is setting the stage for more hawkish sentiment come January. Interest rate increases could follow soon after."

Inflation risk remains

In responding to reporters' questions, Gravelle,who sits on the governing councilthat makes interest rate decisions,admitted that the bank had become more focused on "upside risk" meaning the risk of higher-than-expected inflation because inflationwas already so high.

"Because it is already above our oneto three per cent range, we're much more concerned," he said.

Asked whether the Bank of Canada had abandoned the idea that inflation was transitory following U.S. Federal Reserve chair Jerome Powell's declaration he was "retiring" the term, Gravelle insisted that whatever it is called, Canada's central bank remains convinced current high levels of inflation will disappear by the end of 2022.

The deputy governor spentmost of his speech reiterating the bank's view that current inflation was not caused by rates that are too low but by distortions caused by the pandemic and its recovery.A consumer shift back to buying services, such as flights and restaurant meals, would relieve price pressure on physical goods,Gravelle said, and businesses would find ways to get the kinks out ofsupply chains.

It would just take time.

Waiting for Washington

If that does not happen, Gravelle insisted that the bank would use its tools read interest-rate hikes to pull inflation back down toward its two-per-cent target range.

But independent of any action by Ottawa to change the central bank's mandate, Gravelle and his governing council have another constraint: Inflation is an international phenomenon.

Despite repeated insistence that it operates independently, the Bank of Canadasimply cannot act alone to defeat what is a global problem. Hiking rates significantly before the U.S. central bank decides to do the same thingwould distort the price of the loonie, and thustrade without solving the problem.

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