The Bank of Canada appears set to resume interest rate cuts next week following a dramatic weakening in Canada’s labor market that has economists and investors betting on monetary easing.
Statistics Canada reported Friday that the country shed 66,000 jobs in August, crushing forecasts that called for a modest 5,000 increase. The unemployment rate jumped to 7.1% from 6.9% in July, matching its highest level since August 2021. July also saw 41,000 job losses.
Investor expectations for a quarter-point rate reduction at the Bank of Canada’s September 17 decision surged to over 70% following the employment data, up from 55% the previous day.
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The central bank has maintained its key lending rate at 2.75% since March, following two earlier cuts in 2025. Officials had been watching for clearer signals on whether trade tensions with the United States would significantly damage Canada’s economic growth while core inflation remained elevated.
CIBC economist Andrew Grantham noted the job market deterioration extends beyond trade-sensitive industries, saying sectors affected by tariffs weren’t the only ones shedding workers, suggesting broader economic weakness.
Second-quarter economic data showed Canada’s gross domestic product contracted 1.6% on an annualized basis, steeper than the Bank of Canada’s forecast for a 1.5% decline. The downturn came after a strong first-quarter performance as companies accelerated shipments to beat potential US tariffs.
August’s employment decline hit manufacturing and transportation hardest, losing 19,200 and 22,700 positions, respectively. However, job cuts also affected professional services and the education sectors.
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Scotiabank and Bank of Montreal revised their forecasts this week to anticipate rate cuts, joining the consensus among major Canadian financial institutions.
Derek Holt from Scotiabank argued that delivering just one rate reduction would have minimal impact, forecasting consecutive quarter-point cuts at the bank’s next two meetings.
Financial markets are pricing in potential rate reductions that could bring the overnight rate to between 2.0% and 2.25% by December, depending on economic conditions.
Governor Tiff Macklem faces the challenge of supporting growth while maintaining the bank’s inflation-fighting credibility. Core inflation measures remain at 2.4%, above the bank’s preferred range, though headline inflation has cooled to 1.7%.
The Bank of Canada’s decision coincides with the Federal Reserve’s policy meeting, where US officials also face pressure to reduce borrowing costs.
Canadian five-year government bond yields, a key benchmark for fixed mortgage pricing, declined to approximately 2.7% after the jobs data, reaching their lowest point since June.
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