The Bank of Canada is closely monitoring the state of the economy and is concerned about the impact of weak job market conditions on economic growth. In a recently released summary of deliberations, the central bank highlighted the potential risks associated with a sluggish labor market. Some members of the governing council expressed worries that further weakness in employment could delay the rebound in consumer spending, putting downward pressure on growth and inflation.
As consumer price growth continues to ease, the Bank of Canada is placing more emphasis on the risks of falling below its two percent inflation target. The central bank has signaled its intention to continue cutting interest rates as long as inflation slows in line with its projections. Currently, the key interest rate stands at 4.5 percent, with the next rate announcement scheduled for September 4.
According to Royce Mendes, managing director and head of macro strategy at Desjardins, Canadian central bankers felt a sense of urgency to reduce rates in July. Despite the belief that consumer spending will rebound, officials are acknowledging the risks posed by upcoming mortgage renewals and ongoing weakness in the labor market. The Canadian economy has managed to avoid a recession, but there are signs of fragility, with the economy appearing to have shrunk on a per-person basis.
The Bank of Canada’s decision to lower its policy rate last month was driven by the goal of boosting economic growth. The labor market, which was robust in the aftermath of the COVID-19 pandemic, has now slowed down significantly. Employers are reporting fewer labor shortages, and job seekers are facing limited options, leading to a rise in the unemployment rate, which reached 6.4 percent in June.
Looking ahead, Mendes predicts that the Bank of Canada will continue to cut rates at each of its remaining decisions in 2024, with a terminal rate forecast of 2.25 percent by the end of 2025. The expectation is for three consecutive 25 basis point rate cuts by the Federal Reserve over the remainder of the year, prompting Canadian central bankers to follow suit.
In conclusion, the Bank of Canada is closely monitoring economic indicators and is prepared to take further action to support economic growth. The challenges posed by a weak labor market and slowing inflation are key considerations for policymakers as they navigate the path to recovery. The upcoming rate decisions and labor market reports will provide further insights into the state of the Canadian economy.