Bank of Canada senior deputy governor Carolyn Rogers followed the central bank’s decision on March 8 to leave interest rates unchanged with a speech in Winnipeg that added some subtle context to how policymakers are thinking about inflation and whether they might have to resume raising interest rates. Here’s what you need to know:

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Kevin Carmichael: 3 things Carolyn Rogers told us about how Bank of Canada is thinking about the economy Back to video

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Canada isn’t an island

Bay Street this week is chattering about the currency. Ahead of Bank of Canada governor Tiff Macklem’s decision to leave interest rates unchanged, his counterparts at the European Central Bank and the United States Federal Reserve clearly stated that their inflation fights are far from finished.

All things equal, higher interest rates in the U.S. and Europe will make those places more attractive destinations for short-term investment, favouring the dollar and the euro over other currencies. A weaker currency could put upward pressure on inflation by making imports more expensive. So, if the Fed and the ECB are raising rates, some analysts assume the Bank of Canada will have to keep pace in order to keep the exchange rate stable.

Rogers indicated the Bank of Canada knows that conditions in the U.S. and Europe could force its hand, but maybe not because of exchange rates. She chose to highlight that Canada’s largest trading partners appear to be growing faster than expected. She also said it was something policymakers debated during the latest deliberations.

“We noted that in the United States and Europe, near-term outlooks for growth and inflation are now somewhat higher than we expected in January,” Rogers said. “In particular, labour markets remain tight and core inflation is still high. Since these are our main trading partners, this could point to some further inflationary pressure in Canada.”

That inflationary pressure could come from purchasing imports with a weaker currency. But the inflation risk the Bank of Canada appears to be most worried about is the combination of a weak currency mixed with continued demand for exports. That could stoke growth at the very moment the central bank is trying to slow the economy.

Rogers noted that energy prices are stable, so perhaps that will offset any unexpected inflationary pressure. But she also said China’s economy is recovering now that authorities have abandoned their zero-COVID-19 policies, and that Russia’s war on Ukraine remains a source of uncertainty. Both could ignite commodity prices at any moment.

“With inflation still well above our target, we’re still more worried about upside risks,” she said.

Too much of a good thing

“We talked a lot about the labour market,” Rogers said.

That’s because the most aggressive series of interest rate increases in the central bank’s history last year appeared to have little effect on hiring. The jobless rate is holding near historic lows, complicating the Bank of Canada’s strategy because its models suggest the jobless rate will have to increase at least somewhat to take the heat off inflation.

For now, the central bank is sticking with logic: the economy stalled in the fourth quarter, so hiring must follow. “The labour market remains very tight,” Rogers said. “With weak economic growth for the next couple of quarters, however, we expect that the tightness in the labour market will ease and, as it does, pressure on wages will come down.”

The labour market remains very tight,

Carolyn Rogers

The Bank of Canada isn’t against anyone getting a raise, but a tight labour market puts upward pressure on wages, and that feeds through to demand. For now, the central bank is convinced there’s more demand than providers of goods and services can supply. That’s a recipe for inflation.

It’s the productivity, stupid

Various indicators show wages are increasing at an annual rate of between four per cent and five per cent. In many ways, that’s positive, considering wage growth had been chronically weak. But the Bank of Canada contends wage growth at that pace is more than the economy can handle without overheating. That’s because suppliers can’t keep up, so they end up charging more for the goods and services they provide.

But what if supplies could keep up? One of the reasons they can’t is because Canadian productivity is so weak. In other words, companies have invested too little money and time in innovation and creating the capacity to handle increased demand.

There’s not much the Bank of Canada can do about that.

“You may remember me saying if strong wage growth isn’t accompanied by strong productivity growth, it will be hard to get to two-per-cent inflation,” Rogers said. “Well, we noted that data last week showed labour productivity in Canada fell for the third straight quarter, so productivity isn’t trending in the right direction so far.”

Some of the politicians, executives and union leaders who have tended to blame the Bank of Canada for inflation might want to think a little more deeply about where the fault lies.

• Email: kcarmichael@postmedia.com | Twitter: carmichaelkevin