Better-than-expected employment results push Bank of Canada for another rate hike

In June, Canada’s economy added more jobs than economists had forecast, prompting some experts to predict another rate hike by the country’s central bank at its next meeting scheduled for July 12.

The economy added 60,000 jobs last month, compared to the 20,000 economists expected, with the unemployment rate rising to 5.4%, according to the latest data released by Statistics Canada.

In response to the strong numbers, Deloitte Canada Chief Economist Dawn Desjardins predicts that the Bank of Canada will raise its key interest rate yet again next week.

“I think that really justifies the last rate change in June and justifies another change coming next week,” she said in an interview with Bloomberg.

Desjardins noted that although the wage growth figures are somewhat weak, they are still too high for the Bank of Canada. The data showed that average hourly wages rose 4.2% year-on-year in June after rising 5.1% in May.

“From what the Bank is watching, it’s not going to be ‘OK, mission accomplished.’ I think they will continue to worry about the pressure that rising wages are putting on inflation,” she said.

Desjardins expects Canadian inflation to slow in the coming months but still remain above the central bank’s 2 percent target.

Another economist also agrees with this view.

“Today’s numbers only reinforce expectations for the bank to act next week,” said Robert Kavcic, senior economist at BMO Capital Markets.

He noted that the labor market is extremely tight, and it will take more time to achieve the indicators required by the Bank of Canada.

“The labor market will be the last to give up,” he added.

However, Kavcic said he is also keeping a close eye on how the rate hike affects the housing market.

“If the sector of the economy that is most sensitive to interest rates (housing) actually stabilizes and accelerates, as it did in Canada in the spring, then this is a pretty clear warning signal that monetary policy is not tight enough,” he warned.

Kavcic added that the central bank’s June interest rate hike is already having a gradual effect on housing cooling in early data his team is monitoring.

Kavcic expects the bank to maintain higher rates for longer than expected in such an environment to ensure it hits its 2 percent inflation target.

Meanwhile, another economist argues that the Bank of Canada should refrain from raising next week in order to have more time to assess economic data.

“We are in favor of pausing rate hikes for July as it helps slow the pace of rate hikes and gives the central bank more time until the next meeting in September to reconsider,” said Tuan Nguyen, accounting and advisory economist at RSM Canada.

Nguyen pointed to a slight slowdown in wage growth as an indicator of a possible slowdown in the future. “The jobs report has pushed the economy somewhat closer to a soft landing than before,” he added.