Jobs report casts doubt on rate cut in June

Jobs report casts doubt on rate cut in June
Jobs report casts doubt on rate cut in June

Canada’s job market has cooled significantly over the past year as interest rate hikes from the Bank of Canada weighed on economic growth. (Photo: The Canadian Press)

The chances of a Bank of Canada interest rate cut in June appear to be narrowing with the latest jobs report from Statistics Canada showing the Canadian economy added 90,000 jobs last month.

Job creation far exceeded forecasters’ expectations and was the largest increase in employment in more than a year.

The unemployment rate remained stable at 6.1% in the country in April. In Quebec, employment increased by 19,000 — representing the first significant increase since September 2023 — and the unemployment rate increased by 0.1 percentage point to reach 5.1%.

According to Statistics Canada, the increase in employment in the country in April was mainly attributable to part-time work, which increased by 1.4%, and to the private sector.

In the eyes of James Orlando, economic director of TD, the employment figures were a “real shock” and they “were not even in the realm of anyone’s predictions”.

The increase in employment in April marks the largest monthly increase since January 2023.

Friday’s report comes as economists widely expected the central bank to begin lowering its key rate in June or July. The Bank of Canada has been particularly encouraged by the progress on inflation and has signaled that it is moving closer to a rate cut.

But the latest jobs figures make financial markets less certain of an interest rate cut next month.

TD still plans a first reduction in July. Orlando said waiting until July would give the central bank more confidence that it would not cut interest rates prematurely.

“This simply gives the Bank of Canada a little more time to ensure that the current economic environment (…) does not lead to an increase in inflation,” he says.

The April labor force survey suggests that there may be better economic dynamism in the second quarter, which could translate into an increase in consumer spending, says Mr. Orlando.

Jobs were added in particular in the professional, scientific and technical services, accommodation and food services, health care and social assistance, and natural resources sectors.

However, employment declined in the public services sector.

The average hourly wage of employees rose 4.7% year over year last month, after increasing 5.1% in March.

Trust long-term trends

BMO chief economist Douglas Porter also believes Friday’s report gives the Bank of Canada “some pause.”

But Mr. Porter believes the bank may choose to focus more on long-term trends, suggesting that economic stagnation is deepening.

Porter said BMO still expects an initial interest rate cut in June, but said that move would require the next inflation report to show significant progress.

Bank of Canada Governor Tiff Macklem has generally focused on trends rather than a particularly strong or weak economic report.

Looking at the bigger picture, it is clear that rising interest rates have had adverse consequences on economic growth and the labor market.

Population growth has outpaced job creation over the past year, pushing the unemployment rate up a full percentage point. There were 1.3 million people unemployed in April.

Compared to last year, unemployment is up across all major demographic groups, with young people hardest hit, Statistics Canada said.

Although Friday’s report changed expectations, economists say April’s inflation report will be the deciding factor in whether or not the Bank of Canada will cut interest rates in June.

“If inflation shows a further downward trend, I think that opens the door to a possible reduction in June,” says Mr. Orlando about the Bank of Canada.

“But they have to look at things quite holistically. And the sustainability of inflation, which has fallen to around 2%, depends on the economy not recovering too much,” he adds.

Canada’s annual inflation was 2.9% in March, within the central bank’s 1-3% target range. Core inflation measures, which exclude price volatility, also continued to decline.

The Bank of Canada’s key interest rate currently stands at 5%, its highest level since 2001. Its next interest rate decision is scheduled for June 5.

Nojoud Al Mallees, The Canadian Press

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