Canada’s jobless rate slipped to 6.5% in January, its lowest level since September 2024. The move is expected to strengthen the case for the Bank of Canada to sit tight on interest rates through 2026 rather than deliver more relief for borrowers.
Statistics Canada reported that the decline was driven not by hiring, but by fewer Canadians looking for work, sharpening questions about how much slack really remained in the labour market.
Unemployment fell 0.3 percentage points from December’s 6.8% as the number of people searching for work dropped by about 94,000, or 6.1%.
The participation rate slid 0.4 percentage points to 65%, with much of the pullback concentrated in Ontario. Employment, meanwhile, decreased by roughly 25,000 on the month, and the employment rate edged down to 60.8%, its first decline since August 2025. Manufacturing bore the brunt of the hit, shedding about 27,500 positions, most of them in Ontario, as United States tariffs continue to weigh on factory payrolls.
Job losses masked by shrinking labour force
“Canada's job market started the new year on a mixed note. The economy lost jobs, but the unemployment rate still fell as fewer people looked for work last month,” Tony Stillo, director of Canada economics at Oxford Economics, said. He added that employment decreased by 25,000 in January and that “the employment to population ratio edged down 0.1ppt to 60.8%, its first dip since August.”
However, Stillo said the jobless rate still moved lower as “slower population growth and a large drop in the participation rate caused the labour supply to shrink by around 90,000 m/m,” the biggest monthly decline since January 2022, when lockdowns pushed many people out of the labour force.
“We've long highlighted that a shrinking labour supply would put downward pressure on the unemployment rate, and that trend will likely persist as the population shrinks in the months ahead,” he said.
Rate path seen steady – and what it meant for mortgages
Stillo said more job losses are likely in the first half of 2026 as “still elevated trade policy uncertainty and US tariffs combine with weak domestic demand to curb employment demand and trigger modest layoffs,” with job growth resuming only around mid‑year and the renegotiation of United States-Mexico-Canada agreement (USMCA) on July 1 described as “pivotal.”
He also said that, like the central bank, Oxford Economics still sees slack in the labour market and “expect the BoC to remain on hold though 2026, before lifting the overnight rate back to 2.75% by mid‑2027.”
The Bank of Canada already held its policy rate at 2.25% at its January 28 decision, judging that the current setting was “appropriate” as long as the outlook for modest growth and near‑2% inflation stayed intact.
Market economists, including RBC and TD, similarly expect a prolonged hold through 2026, warning that unpredictable US tariffs and the USMCA review make any sudden move unlikely.
CMP
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