Is a big Bank of Canada rate cut on the way?

A further cooldown in Canada's labour market, reported last week for August, intensified speculation that the Bank of Canada could be about to cut interest rates in its next decision, scheduled for September 17. 

That Statistics Canada report revealed a loss of 66,000 jobs last month, following a 41,000 drop in July, as the national unemployment rate climbed by 7.1%. That marks the highest jobless rate outside the pandemic for nearly a decade, but economists still don't view a cut next week as a home run. 

The upcoming Consumer Price Index (CPI) release on September 16, just before the next BoC meeting, remained a key variable. “Another softer inflation print could raise odds for additional easing relative to our current base case that assumes the BoC has already reached the end of the cycle,” Royal Bank of Canada (RBC) senior economist Claire Fan said.

BMO’s Sal Guatieri wrote, “Stubborn core inflation sets a high bar for another Bank of Canada rate cut, reducing the odds of a move on September 17.” He added that if future job and inflation reports remain subdued, the Bank could ease in October, eventually taking the policy rate down 75 basis points to 2.0% before next spring.

TD economist Rishi Sondhi argued that “domestic demand looks to have surprised on the upside. On the margin this could enhance the argument for the Bank to stand pat on rates at their September 17 meeting.” However, CIBC’s Andrew Grantham said, “We continue to think that a couple more interest rate cuts from the Bank of Canada are needed to accelerate the recovery, and assuming no fireworks in next week’s LFS figures, we forecast the first of those being delivered at the upcoming September meeting.”

Labour market weakens as trade war bites

The trade war’s impact has been especially pronounced in manufacturing, which shed 58,100 jobs over the past seven months. Professional, scientific, and technical services lost 26,000 positions in August alone. Ontario, British Columbia, and Alberta saw the largest regional job losses, while Quebec remained stable.

“Southern Ontario cities continue to shoulder the nation’s highest unemployment rates, with Windsor (11.1%), Oshawa (9.0%), and Toronto (8.9%) bearing the brunt of trade war impact,” Fan said.

Inflation concerns linger, but market expects easing

While Canada’s overall inflation rate remains below the BoC’s 2% goal, the underlying rate is tracking “moderately above the target,” Guatieri said. Desjardins Group economist Royce Mendes argued that inflation worries have been overstated by temporary factors, suggesting “it’s really time to move the inflation worries to the back burner and start focusing…on supporting the economy, with the unemployment rate near 7%.” Mendes flagged that markets may be underestimating the scope of future BoC cuts.

Despite the negative headlines, some fundamentals remain resilient. Fan noted, “We don’t expect that will spread and cause a sharp, broad-based contraction,” citing healthy domestic consumer spending and Canada’s relatively low average tariff rate under CUSMA.

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