What jobs data means for Bank of Canada and interest rates

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The Canadian economy generated 91,000 jobs in December, beating economist estimates and pushing down the unemployment rate to 6.7 per cent from 6.8 per cent the month before.

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Economists had expected only 25,000 positions to be created and for the unemployment rate to rise to 6.9 per cent.

The data are seen as critical to the Bank of Canada and its next interest rate decision on Jan. 29.

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Here’s what economists think the jobs numbers mean for policymakers and rates.

A rate cut and then a pause: Desjardins

“Hiring moved into a higher gear in Canada during the final month of last year,” Royce Mendes, managing director and head of macro strategy at Desjardins Group, said in a note.

Besides the stronger-than-expected labour numbers, the economy also churned out a decent number of full-time positions across many sectors, he said.

Meanwhile, slowing population growth and an unchanged participation rate — the number of people working or looking for work — allowed the jobless rate to fall.

Total hours worked rose 0.5 per cent from the previous month, though Mendes attributed some of that to striking workers returning to their jobs. Average hourly wage growth slowed.

“Given the still-elevated unemployment rate and the cooler wage readings, the latest labour market data still leaves the Bank of Canada in a position to cut rates,” Mendes said.

He expects the Bank of Canada to cut in January and then pause in March.

Rates will ultimately have to come down to two per cent, he said, “with more aggressive tariff threats weighing on business confidence and the recent rise in global bond yields tightening domestic financial conditions.”

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‘Odds of a pause increase’: Capital Economics

The 91,000 bump in jobs in December was the largest in two years and “supports our view that labour market conditions are strengthening,” Bradley Saunders, North America economist for Capital Economics Ltd., said in a note.

While the gain was impressive, he said it came more from an increase in public-sector hiring rather than the private sector. Nevertheless, jobs were created across different sectors, including education, transportation and warehousing.

In December, the population rose 67,000, the smallest increase in two years and suggests federal immigration policy changes are starting to affect the number of newcomers entering the country.

Over the past few years, record numbers of immigrants have come to Canada, but the labour market has been unable to generate the jobs needed, resulting in rising unemployment.

Given the weakness in private-sector hiring, there is still a case to be made for a 25-basis-point cut in January. But Saunders now thinks the labour numbers add fuel for the Bank of Canada to take a break at its upcoming meeting.

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“The odds of a pause have now clearly increased,” he said.

‘Keep Bank of Canada on track’: Oxford Economics

“Canada’s labour market ended 2024 with a bang,” Michael Davenport, an economist at Oxford Economics Canada, said in a note. “But we caution against overreaction to one month of jobs data.”

He said there remains plenty of “slack” in the job market — that is, people looking for work — which will push the unemployment rate up to seven per cent sometime in early 2025.

Although the jobless rate fell in December, it is still up 0.9 percentage points from a year ago, when it was 5.8 per cent.

Davenport said encouraging signs include an increase in the employment-to-population ratio “for the first time in nearly two years” and a slowdown in wage growth.

Wage growth has been on the Bank of Canada’s radar for a while, with policymakers worried it would fuel inflation. Wage growth started slowing last year after peaking — excluding the pandemic year — at 5.65 per cent in December 2023.

“Despite the strong December employment report, the labour market remains loose and inflation is below the two per cent target,” Davenport said. “This should keep the Bank of Canada on track to cut rates by a smaller 25 basis points later this month.”

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Cut to ‘stimulative’ levels: RBC

Royal Bank of Canada assistant chief economist Nathan Janzen isn’t getting too excited about December’s job numbers, which blew past expectations.

“The data are notoriously volatile, and the unemployment rate is still up almost a percentage point from a year ago and is at its second-highest level (outside the pandemic) since 2017,” he said in a note.

Janzen thinks the unemployment rate will resume rising, given that the three-month average rate followed an upward trend in December and job openings continue to slide.

The Bank of Canada during its last rate announcement said it would start to slow the pace of rate cuts since inflation is now around its two per cent target and interest rates, currently at 3.25 per cent, are no longer in “restrictive territory.”

But RBC said the central bank still has a ways to go on rate cuts.

“We continue to expect that, ultimately, the (Bank of Canada) will need to cut the overnight rate to slightly ‘stimulative’ levels this year — below the 2.25 per cent to 3.25 per cent the (Bank of Canada) currently estimates as the likely range for the current neutral rate,” Janzen said.

• Email: gmvsuhanic@postmedia.com

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