MNI: Dropping BOC Max Job Mandate Clause Good Idea-Ex Advisors

The removal from its new five-year mandate of language allowing the Bank of Canada to seek maximum employment at times when inflation is under control undoes a previous mis-step and should improve performance at a time of stubborn prices, some former advisors told MNI.

"Coming out of the Covid recession, this was one of the things that led the Bank to delay raising its policy rate as it waited for the labour market to recover a bit more.  I'm sure it views that as a mistake," said Angelo Melino, an economics professor at the University of Toronto and a former central bank advisor.

The mandate agreed with the government and published on the Bank's website after the release of Canada’s fiscal plan on Thursday was much shorter than the equivalent announcement five years ago, and made only passing reference to the job market while stressing low and stable inflation as the best contribution monetary policy can provide.

MNI reported in September that a staff memo prepared for Finance Minister Francois-Philippe Champagne before meeting with Governor Tiff Macklem about the mandate renewal nudged him to ask more about inflation and supply shocks than jobs language. (See MNI: FinMin's BOC Mandate Memo Lists CPI More Than Jobs Goal)

BACK TO BASICS

The previous mandate contained much longer written commentary on the Bank's remit and references to using monetary policy flexibility to support more jobs when inflation is under control. At that time Macklem and then Finance Minister Chrystia Freeland maintained the job language only affirmed flexibility the Bank already had, but economists were skeptical and since then some have said it was a distraction.     

“It was a very unclear document” last time, said Chris Ragan, a former Bank visiting scholar and a former McGill University professor. The Bank needs to go “back to basics” of inflation targeting, he said.

Inflation at the time was on its way to a peak of 8.1% in June 2022, which would prompt the BOC to hike its policy rate from near zero to 5%, and Macklem told a joint press conference with Freeland there was little reason to think monetary policy would be swayed towards job aspirations.

"Inflation did get out of control starting in 2021, but most central banks made the same mistake the Bank of Canada did," said former Bank adviser Steve Ambler. Policymakers globally have expressed regret at their slowness in realizing that the end of Covid lockdowns would drive up prices. 

After cutting rates to 2.25% last year to support the economy through a tariff dispute with the U.S., Macklem last week hiked to 2.5% and said he's cautiously looking at more to prevent high oil prices from creating widespread inflation.

SIMPLEST FRAMEWORK POSSIBLE

The governor has also said in recent days there's some slack in the job market and the economy more generally, but the inflation target is the first priority. Macklem told MNI in September that inflation must be his first focus even if there was a painful tradeoff against slower growth.

Ambler and others suggested jobs language in the mandate was benign or allowed latitude for the Bank to keep a proper focus on inflation, though none saw it providing  major benefits. 

"The wording change implemented five years ago has arguably never really been relevant to Canada’s monetary policy since it was added, so it remains untested," said Pedro Antunes, a former central bank forecaster now at Signal49. The language was "ambiguous enough to avoid needing to take it out," he said.

Fred Mc Mahon thought keeping the job language would have been acceptable because it was clear controlling inflation was the prime objective. The former Quebec finance ministry official who's met with Bank staff also said he favors a clear mandate. 

"The Bank should aim for the simplest framework possible and conduct an audit of its communications, so that it guides markets only when and where doing so supports financial stability or its mandate of keeping realized and expected inflation close to target," he said. (See MNI TRANSCRIPT: Interview With Bank of Canada Governor Macklem)

MNI INTERVIEW: Carney Building Plan Lacks Labor To Match-CFIB

Mark Carney's budget focused on what he calls the biggest infrastructure boom since World War II to fend off U.S. tariffs is undermined by the lack of a corresponding plan to supply workers needed to build projects, a government business adviser told MNI.

"It's only moderately achievable unless they really think more about how to broaden the scope of filling those gaps," according to Corinne Pohlmann, who manages legislative outreach and economic research for the Canadian Federation of Independent Business. 

Slower growth brought on by the tariffs masks that some industries are struggling to find staff in skilled trades like welding, she said.

"The skilled trades is a definite area where we're going to see a lot of departures in the next few years," she said in an interview. The average worker in some trades is 50 years old, she said. 

POCKETS OF SHORTAGES

The budget presented Thursday outlined tens of billions of dollars a year to support dozens of projects set to be fast-tracked for construction to begin in the next year. Carney wants to double non-U.S. exports over the next decade to break economic dependence on Canada's southern neighbor, and build enough homes to end homelessness. 

"We all support the idea of these bigger projects to get them off the ground," she said. "But you need the people to do it." (MNI: Canada Needs Bigger Push Than Commodity Boom-Ex-Ministers)

Earlier Thursday Bank of Canada Governor Tiff Macklem told lawmakers there are "pockets" of industries lacking skilled workers even with slack in the overall job market. The economy is picking up with exporters adapting to tariffs and deficit spending aimed at boosting investment, he told lawmakers this week.

Canada's jobless rate was 5.5% before the pandemic struck and is 6.5% today. It's still closer to a peak of 7.1% after the pandemic eased. 

BIDDING UP WAGES?

Labor shortages are cited in surveys of CFIB's 103,000 members as the second-biggest obstacle after energy costs. The third item on the list is wages, which will be bid up alongside an economic rebound and building boom, she said.

"Wages are going up because they (employers) know that in order attract the people that you need, that's what you need to do," she said. "But there's a ceiling to that, there's a point when you become un-competitive."  

The budget also laid out a plan to keep cutting immigration targets in coming years. That makes it difficult for Canadian employers in remote locations because it can be hard to find domestic workers willing to relocate, Pohlmann said. Many of Canada's biggest new projects are in rural Canada.  

“Some of the reductions in the immigration system and the temporary foreign worker program have had an impact on employers,” she said. 

The budget appears to give provinces some flexibility to allow some temporary workers to become permanent residents, she said. Other previously announced incentives for skills training funded in this budget also help somewhat, she said.

Canada needs a million building workers by 2035 according to the budget. That's a big ask in a nation of 42 million people. 

MNI BOE WATCH: Hikes To 4% As Policy Not On A 'Pre-Set Path'

The Bank of England voted eight-one for a 25-basis-point hike in Bank Rate to 4% at its November meeting, but said policy will not follow a "pre-set path" while the nine Monetary Policy Committee members' published individual paragraphs revealed disagreement over the likelihood of further hikes.

The vote was more hawkish than widely expected, as the single dissent came from Catherine Mann, who voted for a 50-basis-point hike, and with even the previously most dovish-sounding member, Alan Taylor, backing the increase.

The MPC's statement said that "the degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate.” Market pricing moved to imply a December hike is now more likely than not.

Governor Andrew Bailey, who seems to be close to the centre ground on the MPC, put the evolution of the Middle East conflict at the heart of the policy outlook, telling the press conference that "unless progress towards resolving the conflict is made ... a further increase in Bank Rate may be warranted." 

The Bank's analysis highlighted the absence of second-round inflation effects in the data so far, stating that "there remains limited evidence of knock-on effects on other prices and wages" but the Monetary Policy Report still had a markedly higher inflation peak. (See MNI POLICY: Lack Of 2nd-Round Effects Weighs On BOE Hawkishness) 

The central projection in the report sees CPI inflation peak at 4.9% in Q2 next year. This would "be some 25 basis points higher absent the measures announced at the latest budget," it said in its summary.

"The further planned consolidation is expected to increase the drag from fiscal policy on activity and the output gap in the coming years," it said.

"Activity data in recent months have generally been stronger than expected, adding to the case for modestly tighter monetary policy," it added

DISTINCT VIEWS

Bailey evaded questions about the timing of the next hike at the press conference.

In her individual paragraph published together with the summary, Deputy Governor Sarah Breeden said her reaction function depends on the prospect for second-round effects, saying that the "longer energy prices remain high, the more likely persistent inflationary effects take hold, which would require further tightening in Bank Rate."

Deputy governors Clare Lombardelli and Dave Ramsden noted the balance of risks around the forecast was tilted to the upside, with Lombardelli saying that "in the absence of evidence of weaker inflation pressures, there is likely to be a case for a further increase in rates in the near term."

Megan Greene and Chief Economist Huw Pill, both of whom had voted for hikes at previous meetings, said additional hikes will likely be needed.

Dhingra and Taylor, who had tended to vote for a lower path for Bank Rate than the committee as a whole during its last cutting cycle, emphasised that they did not view this as the start of a hiking cycle.

The fall in the oil price following the U.S. mid-terms came too late for the MPC's forecasts, which as Bailey noted "did not have oil falling to USD95 until May 2027."

In the press conference, Bailey said, "had we known what was going to happen in the last 48 hours, the decision would still be the same."

A box included in the MPR noted that "uncertainty over the length of monetary policy lags is high ... and there is a range of views among the MPC."

"When there remains uncertainty about the length of monetary policy lags, leaning against the risk of second-round effects early may be a more robust strategy than assuming that monetary policy could squeeze out second-round effects quickly after they arise," it said.

MNI NORGES WATCH: Holds, Outlook For More Tightening Unclear

Norges Bank left its policy rate on hold at 4.5% on Thursday after its interim meeting, as widely expected following its September hike, but its guidance left it unclear whether further tightening would be needed.

"There will likely be a need to keep the interest rate high for some time to come. The Committee is prepared to raise the interest rate if the inflation outlook warrants it," the Norwegian central bank stated, noting it would have more information about economic developments in the run-up to the December meeting.

While there were no new forecasts to aid the November decision, the Monetary Policy and Financial Stability Committee said it had seen nothing to suggest the economic outlook had changed significantly since its previous quarterly forecast round in September. (See MNI POLICY: Norges Bank Tightening Comes On Expectation Fears)

September’s rate projection showed the key policy rate holding near to 4.5% before gently decreasing towards the end of next year.

The Committee noted offsetting upside and downside surprises in recent developments. 

"Higher energy prices than assumed pull in the direction of higher inflation, while the strengthening of the krone in isolation will dampen inflation," the economic analysis stated.

Inflation has run well above target, with the core measure CPI-ATE (CPI) at 3.0% in September and CPI at 3.4%.

"Inflation is too high. There will probably be a need to keep the interest rate up for some time to come," Governor Ida Wolden Bache said.

MNI: Yuan To Strengthen Further Despite PBOC Warning Shot

Persistent corporate forex settlement demand into year-end is likely to push the yuan towards 6.60 against the U.S. dollar, despite the People's Bank of China’s strong desire to slow its appreciation, economists and traders told MNI, highlighting the risk of another hike in the FX reserve requirement ratio.

Dong Ximiao, chief economist at Merchants Union Consumer Finance, called the PBOC’s decision this week to raise the FX RRR by 2 percentage points to 6% from Nov 15 – the first hike since December 2021 – a countercyclical measure against mounting appreciation pressure, increasingly one-way speculative bets and the approaching seasonal peak in corporate FX settlements.

Following the announcement on Tuesday, the yuan fell 200 pips from its four-year high, with USDCNY settling at 6.6765 at 4:30 p.m. Beijing time, down 307 pips from the previous session.

Dong said the FX RRR increase would take effect ahead of the November settlement surge and help mitigate FX losses and margin compression for firms resulting from yuan strength. While raising the ratio by 200 basis points carries a strong signalling effect, he noted that it represents only moderate tightening overall, as the volume of foreign currency liquidity to be locked up remains manageable. The move therefore aims to anchor the pace of appreciation rather than reverse the yuan's upward trajectory.

Based on outstanding FX deposits, the increase will lock up about USD20 billion to USD24 billion, a modest amount relative to settlement volumes. The yuan has been appreciating for 18 months, with gains accelerating since late October. The CNY has advanced for 14 consecutive trading sessions since Oct 14, while the premium of spot rates over the daily fixing has approached 700 pips. Meanwhile, the FX settlement ratio has rebounded, rising from 57.2% in July to 65.3% in September.

Zong Liang, former chief researcher at Bank of China, said the yuan's roughly 4.4% appreciation against the U.S. dollar this year, compared with a 3.5% gain in the broad U.S. dollar index, was anomalous. He noted that the yuan had rapidly crossed 6.65 after breaking through 6.68, warning that such a rapid appreciation could undermine export stability.

Although the yuan is likely to maintain its appreciation trend over the medium-to-long term, an annualised appreciation rate of 5% to 7% would be more sustainable, with a trading range of 6.5 to 6.7 per dollar likely to be acceptable. (See MNI INTERVIEW: Chinese Industry Solid Enough For Stronger Yuan）

SIGNALS

An FX trader told MNI that the PBOC has been using its daily central parity fixing to guide a slower pace of appreciation. The fixing lagged well behind spot prices between late September and Nov 2, strengthening by about 205 pips while spot prices rose by roughly 595 pips. The gap between the CNY closing price and the fixing widened from 300 pips in late September to around 580 pips on Oct 30. On Nov 2, the yuan closed at 6.65 at 4:30 p.m. Beijing time, its strongest level this year, 690 pips higher than the day's fixing. (See MNI INTERVIEW: Further Yuan H2 Appreciation Uncertain – Guan）

The yuan's outlook remains uncertain. While resilient exports and conversion flows support further appreciation, headwinds include a 330bp U.S.-China yield gap, potential Fed rate hikes and fluctuations in external demand. Two-way volatility is likely to persist, with USDCNY expected to approach 6.60 by year-end, the trader predicted.

Should appreciation accelerate unchecked, another FX RRR hike remains an option, the trader said. In 2021, the PBOC raised the FX RRR twice, taking it from 5% to 9%.

MNI: Advisors Call For More Measures To Support Chinese Stocks

State-controlled Chinese funds need to increase equity purchases and IPOs have to be more strictly scrutinised if the country’s stock market is to rise out of its downward trajectory, policy advisors and economists told MNI, calling liquidity support announced by the People’s Bank of China earlier this week insufficient given tech sector deleveraging and weak domestic demand.

The PBOC’s CNY100 billion Securities, Funds, and Insurance Companies Swap Facility operation and its 25-basis-point cut in the relending rate for share buybacks to 1% aim to put a floor under the market, shoring up expectations, but they are not enough to boost prices, said Zong Liang, former chief researcher at Bank of China, who noted that overall utilisation of the two facilities remains a fraction of their combined ceiling of CNY800 billion. 

A secular downtrend in stocks is likely to be unacceptable to Chinese policymakers, who are attaching more importance than ever to the equity market, said Zong, calling for tighter scrutiny of IPOs and fresh equity purchases by large state-owned funds, as well as policies to stabilise the broader economy. (See MNI INTERVIEW: China Advisor Calls For More Public Investment)

Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University, said officials need to work on increasing the utilization of the SFISF, which allows institutions to swap stocks, ETFs and bonds for high-grade central-bank bills and treasury bonds to finance market purchases, and of the relending tool incentivising loans to key shareholders for stake buybacks. 

The two tools were pivotal in catalysing the rally which followed their introduction in September 2024, said Zhao, suggesting that institutions obtaining swap quotas should now prioritise investing in companies committed to share buybacks. The recent market pullback, stemming from concerns over previously high-performing tech stocks, has been compounded by weaker demand as China restructures its economy, he said.

LEVERAGED OUTFLOWS

However, Liu Feng, director at the China Chief Economist Forum, said that emergency tools, including ordering state-owned funds to boost their stock holdings, can only halt the decline in stocks rather than independently produce a sustained uptrend.

Whether the stock market can bottom out in Q4 will depend on if the outflow of leveraged capital from the tech sector eases, and whether high-frequency data points to improvements in private investment and household consumption, said Liu, though he added that the current price-to-earnings (PE) ratio of about 13 times for the CSI 300 Index is now reasonable, and that the extent of the correction in core AI-related stocks has already approached levels seen during comparable historical periods.

“Monetary easing and market-stabilisation measures can help anchor index levels, but any recovery in corporate earnings must be validated by data from the real economy,” said Liu, highlighting investor caution at a time when private investment is contracting at a double-digit rate and the property market has yet to find a floor. (See MNI: China's Investment Likely To Decline In 2026 - Advisors)

Margin balance slid from CNY2.7 trillion on Sept 23 to CNY2.5 trillion on Oct 19, contracting by CNY172 billion, with net outflows in 12 out of 13 trading sessions, he noted, adding that policymakers’ signals of support for market stability have proved ineffectual, as market pricing is now more focused on the actual efficacy of policies.

For the moment, China lacks incremental capital willing to take on valuation risks based on fundamentals, he said.

TECH EQUITIES

The China Securities Regulatory Commission has already signaled support for including major index heavyweights and leading tech firms in the targeted buyback relending facility.

Zhao noted that support measures must remain targeted, focusing on index constituents and tech leaders. While tech valuations are still not depressed, as long as companies continue to advance innovation, underscoring the sector's long-term potential, upside momentum remains intact, he noted.

MNI INTERVIEW: Service Growth Solid Amid Supply Concerns - ISM

The U.S. services sector will continue to grow at a solid pace through the end of the year -- and so will prices -- until the conflict in the Middle East is resolved, Institute for Supply Management services chair Steve Miller told MNI Wednesday. 

The ISM services index fell 0.4 percentage point in October to 54.5, slightly below market expectations. The report showed a slower expansion in demand and quicker hiring as well as continued elevated prices. An index at 50 represents the dividing line between expansion and contraction.

"I would expect more of the same until resolution happens on the the war," Miller said. "I'm expecting mid-50s for the rest of the year for the PMI and probably through at least February." 

The developments with the war in the Middle East, especially as Democrats take control of Congress next year, will be crucial for the supply side of the services economy, he said. 

TARIFFS AND FUEL

Tariffs and fuel cost impacts continued to be the most-cited issues impacting respondents’ supply chains, while many respondents indicated they are not yet seeing the full impact of these cost escalations or have not passed them through to customers, he said. 

The prices paid index eased 1 point to 73.0, 3.8 pp above its 12-month average of 69.2. October saw a "very big number," Miller said. There were 19 commodities reported up in price, zero down in price, and three in short supply.

"The last three months we did 72.6, 74, and 73. It looks like we are seeing increases in that stuff flowing through, and more to come," he said. This indicates that more pricing pressure is on the way if oil and tariff cost impacts are not mitigated, even if they do not increase from current levels, he said. (See: MNI INTERVIEW: Hot Economy To Keep Fed Hiking - Andolfatto)

Miller surmises some of the sluggishness for firms to pass on higher costs is due to annual pricing agreements. "There's been a significant popular expectation that this [war] was really just going to be a short-term blip and things would get resolved and would get back to normal and that just hasn't," Miller said. 

HIGH BACKLOG 

The new export orders index surged 8.3 ppts to 55.2, after falling 9.4 ppts the previous month. Recent months have been volatile, Miller said. "There isn't anything that came through in the commentary that says something has changed significantly," he said. 

The employment index increased 1.3 pp to 51.4, which is 2.1 pp above its 12-month average of 49.3. Miller noted firms' commentary around difficulty in finding the right talent for why there wasn't an even higher employment index.

The backlog index increased 1.4 ppts to 58, its highest reading since it hit 58.3 in July 2022. 

"With that backlog being as high as it is, I would bet that it's labor-related and the reason why the number isn't higher is just inability for people to find the right staff, as supported by some of the commentary," he said.