Bank of Canada Officials Worry About Job Market’s

Officials at the Bank of Canada are increasingly apprehensive that a deteriorating job market may hinder a revival in consumer spending, prompting them to reduce interest rates last month. The bank’s six-member governing council devoted “considerable time” to discussing the labor market’s condition during their last interest rate meeting, as revealed in a summary of their deliberations on Wednesday.

Potential Economic Slowdown

Some members voiced concerns that a further decline in the job market could suppress consumption. This could exert downward pressure on economic growth. Additionally, it might affect inflation negatively. Ultimately, they opted to cut interest rates. This was the second consecutive meeting they did so. They lowered the policy rate to 4.50% on July 24.

Cutting interest rates may help stimulate consumption, but could also risk worsening inflation concerns, according to wall street journal subscription.

Adjusting to Economic Reality

Officials’ views that the country’s economy is in excess supply, combined with worries about a weakening job market, indicate the bank has adjusted its decision-making process. This adjustment aims to avoid falling short of the 2% inflation target. According to the minutes, officials concurred that they now need to focus equally on downside and upside risks. They emphasized the symmetric nature of the inflation target. This means giving balanced attention to potential economic growth and contraction. The bank’s new approach reflects a more flexible policy strategy.

Shifting Focus Inflation and Interest Rates

This marks a significant shift, showing the bank’s concerns have changed from reigniting inflation to avoiding high interest rates. Excessively high rates could cause undue economic harm. Policymakers reiterated that it would be “appropriate” to anticipate further rate cuts. This is contingent on inflation continuing to diminish. They are not following a predetermined rate path and will make decisions on a meeting-by-meeting basis.

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Easing Inflation and Unemployment Trends

Officials noted that core inflation measures have “eased meaningfully” since April and observed that price pressures have become “less broad-based.” Canada’s unemployment rate climbed to 6.4% in June, according to Statistics Canada, increasing by 1.4 percentage points since January 2023. It has become more challenging for young Canadians and newcomers to find employment, and the number of job vacancies has normalized.

Labor Market Pressures and Wage Growth

The bank’s surveys of consumers and businesses also indicate easing labor pressures, with rising pessimism among workers regarding their employment prospects and firms reporting fewer shortages. Although wage growth remains high, officials expect it to moderate given the slack in the job market.

Global Economic Impact and Market Reactions

Recently, weaker employment data in the US triggered a selloff in global equities as bonds rallied, with increased expectations that the Federal Reserve will need to reduce borrowing costs more significantly and swiftly than previously anticipated. Yields on Canadian government notes also declined, and traders in overnight swaps are pricing in about 100 basis points of easing from the Bank of Canada officials by March 2025.

Revised Economic Forecasts

Economists at the Bank of Montreal and the Canadian Imperial Bank of Commerce have also revised their forecasts, now expecting Canada’s central bank to ease monetary policy at its September, October, and December meetings.

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