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Last month Governor Tiff Macklem said, “decisions to raise the rate, or to pause and assess the impact of past rate increases, will depend on incoming data and our judgments about the outlook for inflation.”Blair Gable/The Globe and Mail

Canada’s gravity-defying job market in December raises a burning question. Just what are Canadian business owners thinking?

That’s what the top officials at the Bank of Canada must be asking, after Statistics Canada’s release Friday of new data showing that employment jumped by 104,000 jobs last month. That was only, oh, about 100,000 more than economists had anticipated. The entire increase came from private-sector employers.

The central bank needs to figure out – fast – why businesses keep loading up on staff, despite widely held expectations that the economy will grind to a halt, even a recession, in the first half of 2023. With a little over two weeks to go until the next interest rate decision, how the bank interprets the head-scratching labour market will play a major role in determining whether it turns up the rate pressure another notch.

It’s fortuitous, then, that the bank is about to get some answers directly from the employers’ mouths. Its quarterly Business Outlook Survey set for release next week, was always going to provide an important piece in the puzzle for the Jan. 25 rate decision. Now, it looks critical to understanding where this appetite for labour is going – and how it will affect the bank’s efforts to cool the economy and tame inflation.

Let’s remember what the Bank of Canada said last month, after it raised its policy rate a half a percentage point to 4.25 per cent. The bank indicated that with that increase, it no longer necessarily believes that rates must rise further. Rather, Governor Tiff Macklem said, “decisions to raise the rate, or to pause and assess the impact of past rate increases, will depend on incoming data and our judgments about the outlook for inflation.”

The major data releases since then have made a stronger case to raise than to pause. The inflation report for November was, at best, underwhelming; the overall rate barely moved, and core inflation readings inched higher. Now, the employment report delivers much stronger numbers than expected. For some pundits, that spells another rate increase, of at least one-quarter percentage point.

But let’s not overlook that second part of Mr. Macklem’s statement. There’s also “our judgments on the outlook for inflation.”

That implies that the bank’s policy setters won’t be strictly guided by the latest numbers. They will also make some educated guesses as to where the data is headed.

With regard to the employment numbers, the bank needs to get a handle on why hiring has remained so strong even as fast-rising interest rates have put a visible dent in demand. (Note, for example, last week’s November trade statistics, showing slumps in both import and export volumes.)

The Business Outlook Survey will provide vital colour to those judgments, and none too soon.

For those unfamiliar with the survey, it’s a quarterly polling of roughly 100 firms representing a cross-section of the Canadian economy. Businesses are asked about a range of expectations and intentions, including, importantly, their sales growth outlook and hiring plans. Bank of Canada staff also interview the participants to get a deeper understanding of the reasoning behind their survey responses.

The results should shed light on the continued strong hiring in December (which coincides, roughly, with when the survey was conducted), and give Mr. Macklem and his colleagues vital insight into whether this labour strength can be sustained much longer.

It wouldn’t be the first time that the data said one thing, and businesses sentiment pointed to something very different. In late 2014, the Canadian economic indicators looked quite healthy, despite slumping commodity prices, most notably in the energy sector. But oil and gas business leaders told then-governor Stephen Poloz that they were planning massive reductions in capital spending. Mr. Poloz went with the warning signs from the business community, and announced a surprise rate cut in January, 2015 – one that proved prescient, as the commodity slump sent the Canadian economy into contraction in the first half of the year.

It’s possible that Mr. Macklem is, similarly, looking at a data head-fake now. Business sentiment declined significantly in the bank’s third-quarter survey; if it has declined further, the trend will look inconsistent with continued labour-market strength.

A key question is how the country’s high level of job vacancies is playing out as the central bank’s rate increases apply the brakes on the economy. We know that even as hiring has continued, vacancies have gone into decline – they fell by 13 per cent, or more than 130,000, from their June peak to October (the latest figures available).

Perhaps the continued employment growth more reflects businesses filling long-standing staffing shortages for existing operational needs, even as their need for future work force growth is fading. Mr. Macklem has mused for some time that the vacancy overhang would temper job losses as the economy slows or even slips into recession in the coming months. Maybe we’re seeing that in action.

But until the Bank of Canada gets some answers from business owners, it will largely be guessing – at a pivotal moment for rate policy. The results of the survey will tell us a lot about whether the labour fires are still raging – and in need of another douse of rate hikes – or are burning on their last embers.