Bank of Canada's Carney: slack job market warrants low rates

Tue Feb 12, 2013 11:54am EST

* Carney says labor market slack consistent with low rates for some time

* Jobless rate has come down but still too high at 7 pct

* Repeats rate hikes less imminent due to weak growth, inflation

OTTAWA, Feb 12 (Reuters) - A weak jobs market is a factor behind Canada's decision to keep interest rates low, the head of the Bank of Canada said on Tuesday, describing the country's 7 percent jobless rate as undesirably high.

Canada has recovered all jobs lost during the 2008-09 recession but its jobless rate is over a percentage point higher than before the downturn as employers worry about spillover from troubles in the U.S. and European economies. A fifth of those who can't find work are long-term unemployed.

"From an inflation perspective, from a monetary policy perspective, we do see slack ... in the labor market which is consistent with the maintenance of very accommodative monetary policy for some time," Carney told legislators.

The Bank of Canada has held its overnight rate target at 1.0 percent since September 2010. It said last month that an eventual rate hike was "less imminent" due to weaker-than-expected growth and inflation.

Unlike the U.S. Federal Reserve, which focuses on both jobs and inflation, the Bank of Canada has a single target when setting monetary policy: holding inflation around the center of a 1-3 percent range.

But Carney's comments, to a Canadian Parliamentary committee, suggest the bank will also eye employment as it decides when to resume raising rates.

"The unemployment rate is 7 percent, so it's come down, but it's still higher than we would see consistent with full employment," he said.

Canadian market players expect the bank to start raising interest rates again in the first quarter of 2014.

Canadian jobs growth was much stronger than expected in the final months of 2012, puzzling economists who contrasted it with signs of slowing growth. Carney said the outlook for private sector hiring remains upbeat, despite some complaints of a shortage of skilled workers in the Alberta oil patch.

First Deputy Governor Tiff Macklem noted that since the mid-recession employment trough, Canadian employment has grown 200 percent while in the United States it has grown only 60 percent.

Carney said the bank's forecast of 2 percent growth in 2013 and 2.7 percent in 2014 assumes a pickup in business investment, which he said has been "disappointing", and stronger net exports.

"If we don't get that for whatever reason, our forecast is going to be too high. So we need to do as good a job as (possible) highlighting the key elements of the forecast to this committee and to Canadians so people can make their own judgments," he said.

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