Surprise job growth adds uncertainty to Bank of Canada’s rate cut outlook

Last month, Canada’s job data exceeded expectations, with the economy creating almost double the forecasted number of positions. 

This pushed the unemployment rate down to 6.5 percent from 6.6 percent, marking the first decline since the start of the year, according to Financial Post.  

Economists are closely watching these figures to help guide the Bank of Canada’s decision on whether to implement a 50-basis-point interest rate cut at its upcoming October 23 meeting, or stick to a more standard quarter-point reduction. 

David Rosenberg, founder of Rosenberg Research, pointed out that while the headline figure was positive, “the underlying details take the shine off the headline glow” of the latest job numbers. 

Rosenberg explained that if the participation rate had remained steady, the unemployment rate would have actually risen to 6.7 percent, aligning with economists’ earlier predictions. 

Rosenberg also noted that the employment-to-population ratio dropped to its lowest point since July 2021, when the Bank of Canada’s policy rate was close to zero. Additionally, he observed that the number of people who remain unemployed for more than six months is rising.  

Katherine Judge, an economist at CIBC Capital Markets, said that while the Canadian labour market added 47,000 jobs in September—well above the 27,000 expected—the report sent mixed signals.  

Judge highlighted several weaker points in the data, including a 0.4 percent drop-in hours worked compared to August, alongside declines in both the employment and participation rates. 

Judge attributed the drop in the participation rate to workers becoming “increasingly discouraged” in their job search. She noted that this mixed report does not make a 50-basis-point rate cut a certainty in October.  

However, Judge also mentioned that the upcoming consumer price index (CPI) report could influence the decision if the numbers show a softening in inflation. 

Stephen Brown, deputy chief North America economist at Capital Economics, suggested that the increase in jobs and the drop in the unemployment rate may be due to a “seasonal quirk.”  

He explained that fewer young workers left their positions at the start of the school year because of a weaker summer job market.  

However, Brown emphasized that the private sector’s job gains, which increased by 61,000 last month, will be of particular interest to the Bank of Canada, as it closely monitors employment in this sector. 

Brown also noted that average hourly wage growth slowed to a “16-month low” of 4.6 percent. He concluded that this reduction in wage growth decreases the likelihood of a 50-basis-point cut later this month. 

Royce Mendes, managing director and head of macro strategy at Desjardins Group, said that despite the stronger-than-expected job growth, the firm remains confident in its prediction that the Bank of Canada will cut rates by 50 basis points in October.  

Mendes pointed to several signs of weakness in the labour force, which could justify a larger rate cut. 

He explained that the drop in the unemployment rate was largely due to a decrease in the number of people actively seeking work.  

Mendes also highlighted that population growth outpaced hiring, with employment up 1.5 percent year over year, while the working-age population increased by 3.6 percent.  

Furthermore, he noted that the unemployment rate for those aged 25 to 54 rose from 5.4 percent to 5.5 percent in September, reflecting growing slack in this key demographic. 

Mendes added that the drop in hours worked suggests that Canada’s GDP for the third quarter is tracking at an annualized rate of 1.2 percent, well below the Bank of Canada’s 2.8 percent forecast.