Wage growth remained moderate over the summer but, with labour shortages intensifying, it seems likely to accelerate sharply soon. The Bank of Canada’s third-quarter Business Outlook Survey (BOS) added to the evidence of widespread labour shortages, which firms now say are a key barrier to expanding output. Our composite indicator, based on the various BOS questions about labour shortages and wage expectations, suggests that wage growth will accelerate to above the pre-pandemic norm next year. Following its approach to policy setting since the pandemic, the Bank is likely to wait for higher wage inflation to materialise before it becomes too concerned, which leads us to think that it will keep its forward guidance for interest rates unchanged at its meeting this week. But given the widespread signs that wage growth will soon accelerate sharply, we now expect the Bank to begin to raise interest rates sooner than we previously envisaged, in July 2022.
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