BoC to keep interest rates steady amid weak Canadian labour market

Canadian Labour Force Survey report released at 12:30 GMT this Friday.
Bank of Canada’s decision to maintain a 5.0% interest rate despite previous rate hikes.
Recent job losses and GDP contraction indicate a potential mild recession.

Statistics Canada is scheduled to release the Canadian Labour Force Survey report at 12:30 GMT this Friday. It is expected that the job market in Canada will remain weak, which supports the Bank of Canada’s decision to keep interest rates steady, as announced on Wednesday.

Despite raising rates by 25 basis points in both June and July, the Bank of Canada opted to keep the main interest rate at 5.0% during its September policy meeting.

Nevertheless, the bank indicated a willingness to tighten monetary policy further if inflationary pressures persist. While the central bank acknowledged the recent increase in Canadian inflation, it expressed concerns about the economic outlook due to a weakening Canadian labour market.

“The Governing Council decided to keep rates at 5.0% given recent evidence that excess demand in the economy is easing and given lagged effects of monetary policy,” the Bank of Canada stated in its policy statement.

Economic Challenges and Labour Market Outlook

According to Statistics Canada, the economy experienced job losses in two out of the last three months. Surprisingly, the Canadian Gross Domestic Product (GDP) contracted by 0.2% on an annualized basis in the second quarter and showed no growth in July.

This suggests that there might already be a mild recession underway. Furthermore, the annual inflation rate in the North American economy increased beyond expectations, reaching 3.3% in July.

Additionally, the Core Consumer Price Index (CPI) remained persistently high at 3.2% in July, surpassing the anticipated 2.8% rise.

Impact on Bank of Canada’s Policy

The upcoming Canadian labour market report, particularly the data related to wage inflation, is of paramount importance as it could greatly impact the Bank of Canada’s future policy decisions.

The Bank stated in its policy statement that “tightness in the Canadian labour market has continued to ease gradually, but wage growth remains around 4% to 5%.”

Economists anticipate that Canada’s unemployment rate will slightly increase to 5.6% in August, up from 5.5% in July. It’s expected that the economy will gain 15,000 jobs during the month, rebounding from an unexpected loss of 6,400 jobs in July.

Notably, the Bank of Canada closely monitors average hourly wages, which saw a year-on-year increase of 5.0% in July.

TD Securities (TDS) analysts provided the following analysis regarding the upcoming employment data: “We look for the economy to add 20k jobs in August, slightly below the 6m trend and well below levels required to keep up with population growth, with a partial rebound in construction helping to drive the headline print as hiring intentions fade. A 20k print would leave the UE rate stable at 5.5%, while softer wage growth (-0.6pp to 4.4%) should give the report a dovish tone.”