The central bank is caught between strong labour market data and rising inflation risks ahead of its July 30 announcement
The Bank of Canada is set to meet for a much-anticipated decision on interest rates next week (July 30) – but hopes of a rate cut have faded rapidly thanks to surprisingly robust labour market data and a slight jump in inflation.
Statistics Canada announced in the second week of July that the economy added 83,100 jobs last month, pushing the unemployment rate down to 6.9%, defying forecasts for a slight increase. This resilient performance in the labour market suggests a “bounce-back” in business sentiment, according to Royal Bank of Canada (RBC) assistant chief economist Nathan Janzen.
However, this positive jobs data arrives amidst looming economic uncertainties. The threat of a 35% blanket tariff on Canadian imports from the United States, set to begin August 1, casts a long shadow over the economic outlook.
And inflation is also on the up, Statistics Canada said, increasing to 1.9% last month as core pressures remained stubborn.
Economists divided on future rate action
The mixed economic signals have led to a divergence of opinions among economists regarding the BoC’s next move. RBC’s Frances Donald, chief economist, suggests the central bank may be done cutting interest rates for now.
In an interview with The Canadian Press, Donald argued that further rate cuts might not address the specific weaknesses in the Canadian economy, such as those in tariff-struck sectors or the housing market, and that fiscal policy support from the government would be more precise. She noted that the 2.25 percentage points of interest rate cuts already delivered over the past year are only now beginning to filter into the economy.
Conversely, Bank of Montreal (BMO) managing director Benjamin Reitzes, while acknowledging the “pretty decent” jobs figures, points to gathering storm clouds over the Canadian economy, suggesting skepticism about its underlying strength. BMO currently forecasts three more interest rate cuts, with the last one expected in March of next year.
Stephen Brown, deputy chief North America economist at Capital Economics, also told The Canadian Press it’s “quite unlikely” that the economy is in a position where it doesn’t need any more cuts. Brown anticipates the policy rate could drop to 2.25% before the easing cycle concludes.
Trade war and youth unemployment persist
Beyond the immediate rate decision, longer-term disruptions continue to shape Canada’s job market. The ongoing trade war has impacted business confidence, with early evidence suggesting an effect on the job market, particularly in provinces like Ontario and Quebec, which are heavily exposed to tariffs.
Cities with higher US trade exposure, such as Windsor, Ont., where the unemployment rate is currently over 11%, have generally experienced weaker labor market performance.
Additionally, the youth job market remains challenging, with the unemployment rate for returning students jumping above 17% in June—the highest level since 2009, according to a new report from BMO Economics.
Canada’s overall youth unemployment rate has been pushing decade highs, currently above 14%, a level typically seen during recessions. This is primarily attributed to strong population growth rather than a decline in participation. While immigration caps are now in place, a gradual rebalancing of the youth job market is expected to take time.
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