Bank of Canada governor Tiff Macklem and senior deputy governor Carolyn Rogers are shown following their interest rate announcement on July 24. (Reuters/ CBC News)
The Bank of Canada aims to accelerate economic growth, but some members of its governing council worry that a weak job market could impede progress. This concern emerged in the central bank's summary of deliberations before the July 24 rate decision.
The summary reveals that some council members fear further labor market weakness could delay consumer spending recovery, thus slowing growth and inflation. With consumer prices easing, the central bank is now more focused on the risks of not meeting its two percent inflation target.
The Bank of Canada has indicated it will continue to cut interest rates if inflation continues to slow as projected. Currently, the key interest rate is 4.5 percent, with the next rate announcement set for September 4.
Royce Mendes, managing director and head of macro strategy at Desjardins, in a client note stated that Canadian central bankers felt more urgency to reduce rates in July.
While the central bank remains optimistic that consumer spending will rebound, officials are aware of significant risks, such as impending mortgage renewals and the persistent weakness in the labor market.
The Canadian economy, although avoiding a recession despite high interest rates, shows signs of fragility. On a per-person basis, the economy appears to have contracted, according to the Bank of Canada.
The document emphasizes that last month's decision to lower the policy rate was partly to stimulate economic growth. The robust job market seen after the COVID-19 pandemic has cooled significantly. Employers report fewer labor shortages, and job seekers face fewer opportunities, leading to a steady rise in the unemployment rate, which hit 6.4 percent in June. Statistics Canada will release the July labor force survey on Friday.
"We now expect the Bank of Canada to cut rates at each of its remaining decisions in 2024, reaching our terminal rate forecast of 2.25 percent by the end of 2025," Mendes said. He also added, "We no longer see Canadian central bankers pausing in December, as we expect the Fed to also implement three consecutive 25 basis point rate cuts over the rest of this year."
