Increased productivity, business investment, needed to temper inflation

OTTAWA – The governor of the Bank of Canada says higher interest rates are coming, but businesses also need to boost productivity to help keep rising prices in check over the long term.

Tiff Macklem, speaking virtually at a Canadian Chamber of Commerce event Wednesday, said businesses have an important role to play by increasing investments in worker productivity to create non-inflationary growth.

“Productivity growth is vital to non-inflationary growth and rising standards of living. At a time when inflation is already well above our target, this is more vital than ever.”

Boosting worker productivity, which measures how much is produced in a set amount of time, is needed so that rising wages don’t lead to higher unit costs, he said.

“Higher productivity pays for higher wages,” he said.

Canada has long lagged the U.S. in business investment, including in information and communication technology that plays an important role in driving productivity growth.

There are signs of increased spending on the way though, with the Bank’s most recent business outlook survey showed 62 per cent of firms plan to spend more on machinery and equipment in the year ahead than last year, the highest level since the survey started in 1999.

Indications are that business investment will grow faster in Canada than in the U.S., as long as businesses actually go ahead with the spending, said Macklem.

“It’s imperative that businesses in Canada follow through on these plans or risk losing out to U.S. competitors.”

He says businesses will also need to lean into the flexible and remote working arrangements created by the pandemic to allow access to a wider labour pool, while workers will also need to be prepared to keep their skills fresh.

The bank said on Jan. 26 that higher interest rates are coming to bring inflation down from its current rate of close to five per cent. Its next scheduled rate decision is March 2.

Macklem said the bank signalled with “unusual clarity” that increased rates were coming because it was important to keep expectations around inflation in check.

“We must keep inflation expectations well anchored. If inflation expectations become unmoored, the costs of getting inflation back to target will be much higher.”

 

Feature image by iStock.com/DNY59