Bank of Canada Governor Tiff Macklem urged caution last week when asked about future interest rate cuts following the central bank’s decision to reduce the rate by 25 basis points to 4.75% on June 5. This cut marked the first reduction in the most aggressive rate-hiking cycle in recent memory.
Macklem emphasized a cautious approach, stating that decisions would be made “one meeting at a time.” However, new jobs data released after Wednesday’s announcement have led some economists to believe another cut could be imminent in July.
The Labour Force Survey for May showed a rise in the unemployment rate to 6.2%, with the employment rate falling to its lowest level since late 2021. The economy saw job gains, but they were all part-time, with full-time positions experiencing their largest drop in nearly two years.
In contrast, the United States saw job growth exceed expectations in May, making it likely that the Federal Reserve will maintain its rate at its upcoming meeting.
Despite the 5.2% wage growth in Canada, Marc Desormeaux, principal economist for Fédération des caisses Desjardins du Québec, believes this won’t deter the Bank of Canada from cutting rates again in July. He pointed out that most wage indicators show a “more contained pace of compensation gains,” and there are signs that wage increases are not fully impacting consumer prices.
“Although wage pressures remain a risk to watch, the labour market is still softening and inflation is easing,” Desormeaux noted. “The bank should — for now — take comfort in these trends.”
The Bank of Canada hinted on June 5 that further cuts could occur if specific conditions were met. According to the team at BofA Global Research, led by economist Carlos Capistran, May’s jobs report aligns with these conditions. “May’s labour report bodes well for the BoC cutting again in July despite the wage growth acceleration,” BofA stated.
The increasing involuntary part-time rate and rising unemployment signal a cooling labour market, supporting a potential 25 basis point cut on July 24, with a forecast rate of 3.75% by year-end, according to Capistran.
CIBC Economics concurs, citing the unemployment rate’s rise and the one-off GDP bounce in April as indicators of a rate cut in July. Katherine Judge, a CIBC economist, highlighted the “ample labour market slack” as a critical factor.
However, some economists remain skeptical. Stephen Brown, deputy chief North American economist for Capital Economics, warned that the unexpected wage growth could complicate a July cut.
James Orlando, senior economist at Toronto Dominion Bank, pointed to the housing market as a reason for caution. Past rate relief has fueled property sales, and the Bank of Canada might move cautiously to avoid this scenario. “We expect the central bank to pause in July, before cutting again in September and December,” Orlando said.
As the Bank of Canada navigates these complex indicators, the path forward remains uncertain, with the next policy decision eagerly anticipated by economists and market watchers alike.
