June 13, 2024
“Let’s just enjoy the moment for a bit,” Bank of Canada governor Tiff Macklem said last week when reporters pressed him on whether the June interest rate cut would be followed by another in July.
Canada’s central bank reduced its rate 25 basis points to 4.75 per cent on June 5, its first cut in the most aggressive rate hiking cycle in recent memory.
Macklem stressed decisions going forward would be made “one meeting at a time,” but jobs data released after Wednesday’s announcement have reinforced the view of some economists that the central bank will cut again at its next meeting in July.
There was no debate that Canada’s Labour Force Survey out Friday was soft.
The unemployment rate rose to 6.2 per cent in May, and the employment rate fell to its lowest level since late 2021. The economy gained jobs, but they were all part-time. Full-time positions dropped the most in one month in almost two years.
Compare that to the United States, where job growth beat expectations in May (see below), pretty much guaranteeing the United States Federal Reserve will hold its rate at its meeting later this week.
Wage growth which climbed 5.2 per cent remains a risk in Canada.
However, Marc Desormeaux, principal economist for Fédération des caisses Desjardins du Québec, does not think this will deter the central bank from cutting again in July. The bank looks at a wide range of wage indictors and most of them show a “more contained pace of compensation gains, ” he said.
There are also indications that wage gains are not being fully passed on to consumers.
“Although wage pressures remain a risk to watch, the labour market is still softening and inflation is easing,” said Desormeaux. “The bank should — for now — take comfort in these trends.”
The Bank of Canada said on June 5 that further cuts could be expected if certain conditions were met and May’s jobs report fits the bill, according to the team at BofA Global Research led by economist Carlos Capistran.
“May’s labour report bodes well for the BoC cutting again in July despite the wage growth acceleration,” BofA said in a note after the data.
Among their arguments is that the involuntary part-time rate increased, suggesting a weaker economy and the rising unemployment rate signals a cooling labour market.
“We expect a 25bp cut on July 24, with the rate at 3.75 per cent by year-end,” said Capistran.
CIBC Economics also sees the central bank on track for a rate cut in July. The unemployment rate is now 1.5 percentage points above its 2022 low, showing that “ample labour market slack has opened. Moreover the bounce in GDP in April appears have been a one-off,” wrote CIBC economist Katherine Judge in a note.
Not all are convinced however.
“The surprising pick-up in wage growth” is reason to be cautious about a July call, said Stephen Brown, deputy chief North American economist for Capital Economics.
For James Orlando, senior economist at Toronto Dominion Bank, it’s the housing market. Signs of interest rate relief have in the past stoked property sales, and the Bank of Canada is “likely to proceed cautiously,” to avoid this, he said.
“For this reason, we expect the central bank to pause in July, before cutting again in September and December,” said Orlando.
