Latest jobs report is not enough to make central bank's direction clear
The latest analysis of the Canadian labour market revealed a loss of 41,000 jobs in July and a rise in the unemployment rate to 6.9%. But what are the implications for interest rates?
Any signs of a weakening Canadian economy add to the Bank of Canada’s delicate balancing act between being keeping inflation in check while being supportive of the economy, but Canada’s largest lender believes there will be no further rate cuts for now.
RBC economist Claire Fan says that, while the jobs report highlighted some weak spots in the economy, it was not out of step with the RBC Economics team’s base case that most of the damage caused by tariffs is already done.
While she expects unemployment to tick higher to 7% (which it was in May), she and her colleagues “do not expect further interest rate cuts from the BoC.”
However, digging into the weeds of the labour report, CIBC’s Andrew Grantham notes that the labour market participation rate was at its lowest since March, keeping a lid on the unemployment rate.
“The reduction in the employment-population ratio will likely get the most attention at the Bank of Canada, and is supportive of a September interest rate cut, albeit admittedly with a lot more data to be released between now and the time of that meeting,” he says, adding that a September rate cut would likely be 25 basis points.
At TD, Leslie Preston expects further stagnation of labour force growth, keeping the unemployment rate from rising too high. But adds that the latest data is not likely to change much in the BoC’s decision making.
“We think a strong argument for further rate cuts remains in Canada, we'll see if the BoC agrees,” he says.
BMO’s Doug Porter notes that July’s job losses followed a strong report in June and “the overall picture is a soft economy, running with some excess capacity, not surprising in light of the trade uncertainty.”
His analysis is that there won’t be high likelihood of a September rate cut unless inflation slows notably over the summer.
“We expect that the job market slack will put downward pressure on inflation, eventually, supporting the case for a return to modest rate cuts,” he says.
