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Bank of Canada Deputy Governor Carolyn Rogers in Ottawa, on Oct. 26, 2022.PATRICK DOYLE/Reuters

The Bank of Canada held its benchmark interest rate steady this week, but central bank officials need to see more evidence that the economy is cooling and inflation is slowing before ruling out further rate hikes, senior deputy governor Carolyn Rogers said Thursday.

In particular, the bank’s governing council remains concerned about the tightness of Canada’s labour market, Ms. Rogers said in a speech to the Manitoba Chambers of Commerce. And it’s paying close attention to stronger-than-expected growth in Canada’s key trading partners, which could impact the exchange rate and add to inflation.

“We’ll need to see more evidence to fully assess whether monetary policy is restrictive enough to return inflation to 2 per cent,” Ms. Rogers, the bank’s second-in-command, told the Winnipeg audience.

The central bank’s decision to hold its overnight rate at 4.5 per cent on Wednesday marked a turning point after eight consecutive rate hikes. However, Ms. Rogers emphasized that this is a “conditional pause,” and that the bank could restart its rate-hike campaign if inflation and economic growth don’t slow as quickly as expected.

Financial markets are pricing in one more quarter-point interest-rate increase this summer and no rate cuts before 2024.

The Bank of Canada is intentionally attempting to slow the economy to cool demand and get prices under control. So far, this campaign appears to be working. Inflation has fallen steadily since last summer, and higher borrowing costs are squeezing interest-rate-sensitive parts of the economy, such as housing. GDP growth stalled in the fourth quarter of 2022.

Ms. Rogers said the economy is developing “broadly in line” with the bank’s latest forecast, justifying this week’s pause. However, she noted that recent economic data present a “mixed picture,” with some parts of the economy showing surprising resilience in the face of tighter monetary policy.

The bank remains particularly concerned about the labour market. Canadian employers added 150,000 positions in January, 10 times what Bay Street analysts had expected. The unemployment rate remained at 5 per cent, near a record low. Data from February’s labour-force survey will be published on Friday.

Low unemployment and strong demand for workers is pushing up wages, which continued to grow by 4 per cent to 5 per cent on a year-over-year basis. This is feeding through into service-sector inflation.

The bank expects unemployment will rise and wage growth will slow in the coming quarters. But the fact that wages are rising while labour productivity is slowing could present a problem, Ms. Rogers said.

“If strong wage growth isn’t accompanied by strong productivity growth, it will be hard to get to 2-per-cent inflation. Well, we noted that data last week showed labour productivity in Canada fell for a third straight quarter, so productivity isn’t trending in the right direction so far,” she said.

Alongside the labour market, the bank will be paying close attention to the trajectory of service-sector inflation, Ms. Rogers said. The bank also wants to see companies “return to more normal pricing behaviour” after a period where businesses have been passing cost increases along to customers more rapidly than usual.

The bank’s decision to pause rate hikes this week put it on a different trajectory than the U.S. Federal Reserve, whose officials have said they expect to increase interest rates several more times. That dynamic could put downward pressure on the Canadian dollar.

“Certainly we will watch the Canadian dollar, if there is a depreciation of the dollar against other currencies, particularly the U.S. dollar … that could potentially feed through to some inflationary pressure as import costs go up for Canada,” Ms. Rogers said in a press conference after the speech.

However, she emphasized that the central bank does not target a specific exchange rate: “We run an independent monetary policy, we make monetary-policy decisions in the interest of the Canadian economy.”

Canadian inflation is increasingly being driven by domestic factors, notably the tight labour market. But Ms. Rogers said that there are still global factors posing an upside risk for inflation. These include stronger-than-expected growth in the United States and Europe, and the potential for the reopening of the Chinese economy to drive up commodity prices.