Bank of Canada still weighing hike, sees job market slack

* Deputy governor Macklem repeats tightening language

* Notes still some slack in labor market

By Rod Nickel

WINNIPEG, Manitoba, Oct 4 (Reuters) - The Bank of Canada is still looking at the possibility of raising interest rates, but also believes there is some slack in the labor market that has not been taken up by the recovering economy, a top official said on Thursday.

Tiff Macklem, senior deputy governor of the Bank of Canada, maintained the hawkish tone the bank first adopted in April in a speech to a business audience in Winnipeg, Manitoba.

"To the extent that the economic expansion continues and the excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 percent inflation target over the medium term," he said, using language identical to the bank's Sept. 5 rate announcement.

The Bank of Canada has held its key overnight target at 1 percent since mid-2010, but this year it resumed signaling its intention to tighten policy. The Canadian economy has recovered more quickly from the 2008-09 recession than its Western peers.

Most of Canada's primary dealers expect the bank to hold rates steady until the second half of 2013 because of pressures from the troubled European and U.S. economies and slowing Chinese growth. No change is expected at the bank's next rate announcement on Oct. 23.

While the country's job market has recovered more quickly from the recession than in other countries, it still has a ways to go, Macklem said. The central bank closely monitors labor conditions to assess how fast the economy is growing and when a rate hike might be warranted.

"With a relatively quick recovery in employment, much of the slack in the labor market following the 2009 recession has been taken up. Nevertheless, most indicators suggest that some slack remains," Macklem said.

The comments indicated the bank believes the overall economy has not yet reached its full capacity either, suggesting it may be in no rush to tighten monetary policy.

"Gauging the tightness of the labor market is a key element in assessing how close the economy is operating relative to its capacity, which, in turn, is an important indicator of inflationary pressures," Macklem said.

Growth has to exceed an annualized 2.0 percent for excess capacity to be absorbed, according to calculations by the Bank of Canada, which has predicted third quarter growth would rise to 2.0 percent from a revised 1.9 percent in the second.

Growth expectations are fairly tepid after downward revisions to June gross domestic product growth neutralized an unexpected 0.2 percent monthly gain in July. Annual inflation in August was well below the bank's 2 percent target.

(Writing by Louise Egan; Editing by Jeffrey Hodgson)

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