Bank of Canada rate cut less certain after employment gains
The chances of a Bank of Canada (BoC) interest rate cut in March have dropped significantly after stronger-than-expected job growth in January, according to economists.
The economy added 76,000 jobs last month, far exceeding economists' expectations of 25,000 new positions, according to Statistics Canada. At the same time, the unemployment rate fell to 6.6% from 6.8% in December, marking the second consecutive month of improvement.
Markets had been heavily betting on a BoC rate cut at its March 12 meeting, but after the latest job data, those odds fell from 80% to 55%. Economists say this stronger-than-expected labour market could give the BoC more room to wait before making a move on rates.
Delayed cuts
Despite the headline job numbers, some economists say the labour market isn’t as strong as it looks.
David Rosenberg and Robert Embree of Rosenberg Research pointed out that part-time positions made up a larger share of January’s job gains than full-time roles, a sign of weaker job quality. They also noted that wage growth is slowing, which suggests employers aren’t feeling much pressure to increase pay.
“If the labour market was tight to any degree, compensation would not be moderating at all, let alone to this extent,” they wrote.
Rosenberg Research believes the BoC should still cut rates at least four more times this year, arguing that the economy is suffering from an output gap that needs to be closed.
Desjardins: Strong job market buys BoC time
Others believe the BoC doesn’t need to rush into rate cuts just yet.
Royce Mendes, head of macro strategy at Desjardins Group, said that with back-to-back strong job reports in December and January, the BoC has more flexibility to wait and see how the economy unfolds.
He also highlighted that total hours worked increased by 0.9% compared to December, leading to upward revisions in first-quarter GDP growth estimates from 1.8% to 2%.
Mendes suggested that the BoC now has more flexibility to keep rates on hold if needed, particularly if new tariffs aren’t implemented by March.
“Central bankers have some flexibility to respond if a shock hits the economy,” he said.
“Rates have risen across the Government of Canada yield curve and the Canadian dollar has appreciated in light of the surprisingly strong data.”
Capital Economics: BoC has “permission” to hold rates
Thomas Ryan of Capital Economics sees little reason for the BoC to cut rates next month.
“You would struggle to find anything disappointing in the January Labour Force Survey,” Ryan said, pointing out that job gains were strong in key sectors like manufacturing and construction.
He also noted that job growth outpaced population growth, meaning that the government’s move to cut the number of international students and temporary foreign workers is starting to show in the data.
While wage growth fell to 3.5%, Ryan said this was actually good news for the BoC, as it suggests inflation pressures aren’t increasing.
“January’s job report gives the Bank of Canada permission to hold on rates in March,” Ryan said, though he still expects a 25-basis-point rate cut later this year.
TD: Rates no longer holding back economy
Leslie Preston, senior economist at TD Economics, believes that the BoC’s past six rate cuts, which have brought interest rates down from 5% to 3%, are finally showing their impact.
“Three consecutive months of solid job growth suggest the cyclical boost to Canada’s economy from lower interest rates is clearly taking effect,” she said.
However, she warned that the looming threat of tariffs could still affect business confidence and slow hiring in certain sectors.
TD had previously forecast that the BoC would lower rates to 2.25% by the end of 2024, but Preston now suggests that interest rate policy alone won’t be enough to stabilize the economy.
“Now it’s over to Canadian governments to do what they can to improve the competitiveness of the economy in the face of the tariff threat,” she said.
Source CMP
By Candyd Mendoza
