The Bank of Canada wants the economy to pick up speed again and some members of its governing council are concerned that weak job market conditions could hinder that process.
That’s according to the central bank’s newly released summary of deliberations detailing discussions ahead of the July 24 rate decision.
“With the emergence of slack in the labour market, some members expressed concern that further weakness in the labour market could delay the rebound in consumption, putting downward pressure on growth and inflation,” the summary says.
As consumer price growth continues to ease, the central bank is placing more emphasis on the risks associated with undershooting its two per cent inflation target.
The Bank of Canada has signalled it will continue to cut interest rates as long as inflation continues to slow in line with its projection.
Its key interest rate currently sits at 4.5 per cent. The next interest rate announcement is scheduled for Sept. 4.
“Canadian central bankers felt more urgency to reduce rates in July,” said Royce Mendes, managing director and head of macro strategy at Desjardins, in a note to clients.
“While the Bank of Canada still believes that consumer spending will rebound, officials are acknowledging the material risks to that view from upcoming mortgage renewals and ongoing weakness in the labour market.”
Bank of Canada governor Tiff Macklem said that while the ingredients are in place to bring inflation down to the bank’s target of two per cent, the bank isn’t guaranteeing more back-to-back interest rate cuts. His comments come as Canada’s central bank lowered its key lending rate to 4.5 per cent on Tuesday.
Economy appears to have shrunk, noted BOC
The Canadian economy has managed to avoid a recession even as interest rates weigh on consumer and businesses spending.
However, other metrics suggest the economy is on shaky ground. On a per-person basis, the economy appears to have actually shrunk, the Bank of Canada noted in the summary.
The document reiterated that the bank’s decision to lower its policy rate last month was partly driven by the desire to boost economic growth.
The rip-roaring labour market job seekers enjoyed in the aftermath of the COVID-19 pandemic is now much more sluggish.
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Employers are no longer reporting as many labour shortages and workers entering the job market are facing fewer choices.
That’s led to a steady rise in the unemployment rate, which reached 6.4 per cent in June. Statistics Canada is expected to release its July labour force survey on Friday.
“We now expect the Bank of Canada to cut rates at each of its remaining decisions in 2024 before reaching our terminal rate forecast of 2.25 per cent at the end of 2025,” Mendes said.
“We no longer see Canadian central bankers pausing in December, as we now expect the Fed to also deliver three consecutive 25 [basis point] rate cuts over this remainder of this year.”