Thursday, February 29, 2024
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Bank of Canada interest rate cut forecasts pushed back

The central bank plans to cut later and less after this data

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Good day,

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The latest figures on Canada’s labor market have some economists thinking the Bank of Canada will make its first interest rate cut.

Jobs numbers released Friday by Statistics Canada were unexpectedly strong, with a gain of 37,000 jobs far exceeding forecasts.

That led some economists who predicted the Bank of Canada’s first cut in April to push back their forecasts until June.

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“While the strong rise in employment in January may paint a healthier picture of the labor market than what lies beneath the surface, the Bank of Canada will remain concerned about the further decline in the unemployment rate and the strength of wage growth,” said Olivia Cross, an economist at Capital Economics.

Equity economists and Royce Mendes of Desjardins Securities pushed back their forecasts for the first cut from April to June.

“Employments data suggest that June is now more likely to see the first rate cut of this cycle by the Bank of Canada than April,” Mendes said in a report to investors.

There are several reasons why the data could worry central bankers.

First, the unemployment rate is not rising as fast as expected. In January it fell again to 5.7 percent, the first drop in more than a year.

“For now, the labor market remains quite tight,” said Maria Solovieva, an economist at Toronto Dominion.

“The unemployment rate declined slightly and remains low by historical standards, and average hourly wage growth of 5.3 per cent year-on-year remains too uncomfortable for the Bank of Canada.”

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An increase in hours worked also suggests a stronger increase in gross domestic product heading into the first quarter.

“Today’s data will certainly not accelerate the path to a first interest rate cut by the Bank of Canada,” CIBC economist Andrew Grantham said in a note after the data came out.

Both CIBC and Desjardins now expect the Bank to cut less this year, ending 2024 at 3.75 percent, 25 basis points less than their previous forecasts. The Bank’s current rate is 5 percent.

Markets have also made adjustments. The probability of a cut between March and April has fallen below 30 percent and expectations for rate cuts have diminished, TD’s Solovieva said.

The most important takeaway from the jobs report is that “there are no obvious signs of stress for the economy,” said BMO chief economist Douglas Porter.

“An increase in decent employment, a fall in the unemployment rate and persistent wage growth of 5 per cent are not elements that justify an urgent call for rate cuts. “The Bank of Canada is likely to view this report as further reason for a patient policy stance,” he wrote.

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GTA Jobs
National Bank

Canada’s working-age population soared in January, but nowhere was that pressure felt more than in the country’s largest city, says National Bank economist Stéfane Marion.

Toronto’s population aged 15 and older increased by a record 32,600 people in the month and, as National’s chart shows, the local labor market couldn’t keep up.

The Greater Toronto Area’s employment-to-population ratio fell to 61.4 per cent, the lowest since 2021, when we were still in the midst of COVID-19 lockdowns.

“The GTA, which historically had an employment rate that averaged 0.8 percent above the national average, is now suddenly behind the rest of the country,” Marion said.

“A deteriorating labor market amid a population boom will continue to put pressure on the infrastructure and finances of Canada’s largest metropolitan area for the foreseeable future.”

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Today’s Posthaste was written by Pamela Heaven with additional reporting from staff at the Financial Post, The Canadian Press and Bloomberg.

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