Bank of Canada Worried Jobs Outlook May Delay Consumer Rebound

(Bloomberg) — Bank of Canada officials are increasingly worried that a weaker jobs market may delay a recovery in consumer spending, a concern that encouraged them to cut interest rates last month.

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The bank’s six-member governing council spent “considerable time” talking about the state of the labor market when they last set interest rates, according to a summary of the deliberations released Wednesday.

Some officials expressed concern that a further deterioration in the country’s job market had the potential to dampen consumption and put downward pressure on growth and inflation.

Ultimately, they decided to cut interest rates for a second consecutive meeting, bringing the policy rate to 4.50% on July 24.

Combined with officials’ views that the country’s economy is in excess supply, the concerns about a weakening job market confirm the bank has shifted its decision-making process to prevent it from undershooting the 2% inflation target.

According to the minutes, officials “agreed they now needed to be as focused on the downside risks as the upside risks,” and that they needed to “put more emphasis on the symmetric nature” of the target.

It’s a marked change that shows the bank’s worries have shifted from reigniting inflation to keeping interest rates too high for too long and causing unnecessary economic damage than needed.

Policymakers also reiterated it would be “appropriate” to expect more rate cuts if inflation continued to ease, echoing Governor Tiff Macklem’s opening remarks to reporters at the July meeting. They added they’re not on a predetermined rate path and will take decisions one meeting at a time.

Officials said they see core inflation measures having “eased meaningfully” since April, and noted that price pressures have become “less broad-based.”

Canada’s unemployment rate rose to 6.4% in June, according to Statistics Canada data, and has risen 1.4 percentage points since January 2023. It’s harder for young Canadians and newcomers to find work, policymakers said, and the number of job vacancies has fallen to more normal levels.

The bank’s consumer and business surveys also show labor pressures easing, officials said — pessimism among workers about their employment prospects is rising as firms say they’re facing fewer shortages.

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And while they flagged that wage growth remains elevated, officials say they expect it to moderate given the slack they’re seeing in the jobs market.

Last week, weaker employment data in the US sparked a selloff in global equities as bonds rallied amid increased bets the Federal Reserve will be forced to cut borrowing costs more deeply and quickly than was previously expected. Yields on government of Canada notes also fell, and traders in overnight swaps are pricing about 100 basis points of easing from the Bank of Canada by March 2025.

Economists at the Bank of Montreal and Canadian Imperial Bank of Commerce also shifted their calls and now expect Canada’s central bank to ease monetary policy at its September, October and December meetings.

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