The Bank of Canada building in Ottawa on Dec. 6, 2022.Sean Kilpatrick/The Canadian Press
The Canadian labour market snapped back to growth in June and companies filled thousands of full-time positions, paving the way for the Bank of Canada to raise interest rates again next week.
Employment rose by 60,000 in June, following the net loss of 17,300 positions in May, Statistics Canada said Friday in a report. Financial analysts were expecting an increase of 20,000 jobs last month.
Despite that gain, the unemployment rate rose to 5.4 per cent from 5.2 per cent, because of a strong expansion in job seekers.
Heading into Friday’s report, analysts had debated whether the Bank of Canada would raise interest rates at its next decision on Wednesday, or wait until September to make that move.
But after a strong month of job creation, all of Canada’s major lenders are now predicting an imminent rate hike that would send the Bank of Canada’s benchmark interest rate to five per cent.
“The rebound in jobs during June, and an unemployment rate that is still low relative to pre-pandemic norms, may have just tipped the scales towards an immediate hike,” Andrew Grantham, senior economist at CIBC Capital Markets, said in a client note.
After holding its policy rate steady at 4.5 per cent since January, the Bank of Canada raised it to 4.75 per cent in June, citing concerns that inflation could get stuck materially above the bank’s two-per-cent target. The policy rate is now at its highest level since 2001.
Since the June decision, Canadian economic statistics have been mixed. For example, Statscan reported on Thursday that the goods trade balance swung to an unexpected deficit of $3.4-billion in May.
The annual inflation rate has ebbed to 3.4 per cent, and it’s widely expected to cool further in the coming months. However, various measures of core inflation are still rising at uncomfortably steep rates.
The labour market, meanwhile, is continuing to churn out jobs. Full-time employment rose by 110,000 in June, and many industries – such as retail, manufacturing and health care – posted large gains. Ontario enjoyed the largest increase (56,000) of the provinces.
“This pace of hiring is hardly what the Bank of Canada was expecting earlier in the year when it paused its rate hiking cycle in anticipation of a rebalancing in the labour market,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a client note.
How economist and market views of the BoC’s next move have shifted in wake of Friday's jobs data
The Bank of Canada is raising interest rates to temper demand and bring inflation under control. To achieve that goal, central bank officials have argued that wage growth will need to ease.
Labour market conditions appear to be softening in various ways. Average hourly wages rose 4.2 per cent on an annual basis in June, down from a 5.1-per-cent pace in May. Job vacancies have also tumbled about 20 per cent from peak levels in the spring of 2022.
The unemployment rate rose in June because of a large increase in the labour force, which is comprised of workers and job seekers. The labour force grew at a faster pace (0.5 per cent) in June than employment (0.3 per cent), resulting in a higher unemployment rate.
Canada’s population is growing rapidly through immigration, with many of those newcomers seeking jobs. Other people may be joining the work force because of cost-of-living pressures.
This boost in participation “will further ease some of the labour shortages reported by employers,” Mr. Mendes wrote. “That said, a growing population will also spur additional demand for goods and services in an economy that’s already running too hot. The latter point is what the central bank will likely focus on in the near-term.”
The U.S. Labour Department reported on Friday that the country added 209,000 jobs in June, down from 306,000 in May, but fairly similar to earlier months this year. The unemployment rate ticked lower to 3.6 per cent from 3.7 per cent.
While analysts are leaning toward a Bank of Canada rate hike on Wednesday, it’s not a guarantee.
Interest-rate swaps, which capture market expectations about monetary policy, are pricing in a 67-per-cent chance of a quarter-point increase at next week’s rate announcement, according to Refinitiv data. Those odds rose slightly after the labour numbers were released.
“There are reasonable arguments on both sides, but the solid June employment report likely tilts the scales toward another hike,” Bank of Montreal strategist Benjamin Reitzes said in a report.
“Barring another burst of strength in the economic data, the BoC will likely pause for an extended period thereafter. However, the risks remain skewed to further hikes through at least the rest of this year.”