The Bank of Canada is closely monitoring the economy and expressing concerns about the weak job market conditions that could hinder the process of picking up speed again. In a newly released summary of deliberations detailing discussions ahead of the July 24 rate decision, some members of the central bank’s governing council highlighted the emergence of slack in the labour market as a potential obstacle to the rebound in consumption. They expressed worries that further weakness in the job market could put downward pressure on growth and inflation.
As consumer price growth continues to ease, the Bank of Canada is placing more emphasis on the risks associated with undershooting its two per cent inflation target. The central bank has signaled its intention to continue cutting interest rates as long as inflation continues to slow in line with its projections. Currently, the key interest rate sits at 4.5 per cent, with the next interest rate announcement scheduled for September 4.
Royce Mendes, managing director and head of macro strategy at Desjardins, noted that Canadian central bankers felt more urgency to reduce rates in July. While the Bank of Canada remains optimistic 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 emphasized that the bank is not on a predetermined path with interest rate cuts. While the ingredients are in place to bring inflation down to the bank’s target of two per cent, there are no guarantees of more back-to-back interest rate cuts. The Canadian economy has managed to avoid a recession despite the challenges posed by interest rates on consumer and business spending. However, other metrics suggest that the economy is on shaky ground, with the economy appearing to have shrunk on a per-person basis.
The decision to lower the policy rate last month was driven by the desire to boost economic growth. The once robust labour market has now become more sluggish, with employers reporting fewer labour shortages and workers facing fewer job choices. This has 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 soon.
Looking ahead, Mendes predicts that the Bank of Canada will continue to cut rates at each of its remaining decisions in 2024, reaching a terminal rate forecast of 2.25 per cent by the end of 2025. The expectation is for three consecutive 25 basis point rate cuts by the Fed over the remainder of the year, with no pause expected for Canadian central bankers in December. The economic landscape remains uncertain, with the central bank closely monitoring developments to ensure a sustainable and robust recovery.