Labour market strains raise pressure on central bank to cut rates despite steady June decision
Canada’s unemployment rate rose to seven percent in May — the highest since 2016, excluding the pandemic years.
The increase signals deeper labour market strain and strengthens expectations for interest rate cuts later this year, according to Statistics Canada’s latest report released June 7.
The number of unemployed Canadians increased by 13.8 percent from a year earlier, and the average duration of unemployment reached 21.8 weeks, up from 18.4 weeks, as per the agency.
Despite the economy adding 8,800 jobs in May — above the expected loss of 10,000 — the labour market showed signs of broad weakening.
Economists are interpreting the data as a clear signal to the Bank of Canada.
As reported by the Financial Post, BMO’s chief economist Douglas Porter described the rising jobless rate as “a loud warning bell,” highlighting the shift from a tight labour market to one where it’s increasingly difficult to find work.
The manufacturing sector, in particular, is under strain.
Capital Economics’ Bradley Saunders said the decline in manufacturing, transportation, and warehousing jobs reflects the end of tariff front-running.
He noted that, while wholesale and retail hiring saw gains — likely driven by summer hiring and domestic demand — the broader labour market remains fragile.
Desjardins’ Royce Mendes pointed to a “key threshold” being breached with the latest unemployment figures.
As reported by the Financial Post, Mendes said Ontario’s trade-sensitive regions were hit hardest, and that even with slowed population growth, new arrivals added to the jobless rate.
Desjardins now projects the Bank of Canada will reduce its policy rate by another 75 basis points this year to reach two percent, with second-quarter GDP expected to land between zero and 0.5 percent.
Despite mounting labour market pressure, the Bank of Canada held its benchmark interest rate at 2.75 percent, citing ongoing uncertainty related to US tariffs.
Governor Tiff Macklem said the central bank is being “less forward-looking” than usual, awaiting more clarity before adjusting policy further, as per The Canadian Press.
Deputy governor Sharon Kozicki, speaking at the C.D. Howe Institute in Toronto, said that trade-sensitive firms consulted ahead of the June decision were less alarmed about worst-case tariff scenarios.
“Overall, firms believed that their worst-case tariff scenarios were much less likely to materialize than they reported earlier this year,” she said, adding that “while uncertainty remains high, there was less talk of catastrophic outcomes.”
According to Kozicki, the Bank of Canada leaned heavily on surveys and real-time data — including restaurant reservations, credit card activity, and truck border volumes — to guide recent decisions.
She noted that traditional macroeconomic indicators offer only a “high-level picture” and can miss how specific sectors and households are affected. “We want to be able to see both,” she said.
Kozicki also said the Bank of Canada has moved away from publishing a single economic forecast, instead offering two illustrative scenarios to account for the unknowns in the trade environment.
The shift in approach comes amid what Macklem described as a more “shock-prone” world.
He said the bank’s inflation targeting framework, which remains at two percent, was tested by recent disruptions but has held firm.
While monetary policy cannot address issues like housing affordability directly, Macklem acknowledged growing public concern and said “the work is ongoing” ahead of the mandate review with the federal government next year.
According to Global News, Macklem compared inflation’s effects to a generational wake-up call, noting that a whole new generation now understands the cost of living volatility not seen since the 1980s.
“The economy does not work well when inflation is high,” he said. “And the primary role of the Bank of Canada is to ensure that Canadians maintain confidence in price stability.”
The next interest rate decision and monetary policy report are scheduled for July 30.
