By Promit Mukherjee and David Ljunggren
OTTAWA, May 26 (Reuters) - The Bank of Canada on Tuesday said structural changes in the labor market were making its job more complicated adding that if it reacted wrongly, inflationary pressures could rise.
Deputy governor Nicolas Vincent said that while the central bank could handle the impact of cyclical forces through changes in interest rates, deeper challenges were harder to control.
"The more our economy faces shocks accompanied by structural change, the less clear-cut our monetary policy decisions will be," he said in a speech in Montreal.
Lower hiring and lower layoffs in the workforce, high long-term unemployment, and a challenging market for the younger population are the three major trends defining the current labor market, he added.
Canada's unemployment rate rose to a six-month high of 6.9%in April as the economy lost a net 17,700 jobs.
Vincent said one of the bank's main challenges was to accurately distinguish structural changes from cyclical fluctuations, particularly in real time.
"With structural change, our options are more complicated. While monetary policy can, to some extent, help the economy transition during periods of restructuring, it cannot compensate for lower supply caused by factors such as trade friction or population aging," he said.
"Moreover, if we were to stimulate demand when the issue is more structural, we could create inflationary pressures."
The bank has kept its key rate at 2.25% since last October and says this is roughly the right level, as long as its economic forecasts hold true.
Canada's labor market has been subdued for well over a year with employment gains and losses marred by high volatility. U.S. President Donald Trump's tariffs have hit some crucial sectors hard, while the uncertainty stemming from the trade policy have almost frozen hiring.
Employment had previously been partly driven by cyclical factors such as a sharp rise in interest rates and lower immigration, Vincent said.
The structural factors are reflected in an aging population that is forcing businesses to hold on to their experienced staff, the divide between the skills employers are seeking and the what workers really have, and the advent of artificial intelligence, he said. (Reuters Ottawa editorial)
