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Bank of Canada Expected to Raise Rates Next Week, Despite Rise in Unemployment Rate

The Canadian labour market is showing some signs of softening as the unemployment rate rises and wage growth slows, but with another solid job gain last month, forecasters are still expecting a rate hike next week.

Statistics Canada reported Friday the economy added 60,000 jobs in June, driven by gains in full-time work.

But as more Canadians searched for work and the population continued to grow, the unemployment rate climbed higher to 5.4 per cent, the highest it’s been in a year.

“The reason the unemployment rate can rise alongside historically strong employment growth is that population growth continues to set new records—including an 84k monthly increase in June,” wrote RBC assistant chief economist Nathan Janzen in a note to clients.

June marked the second month in a row the unemployment rate has risen as economists watch for softening in the labour market amid high interest rates.

Job gains were concentrated in wholesale and retail trade, manufacturing, health care and social assistance and transportation and warehousing.

The loosening of the labour market likely comes as good news to the Bank of Canada, which is looking for signs that its aggressive rate hikes are working to cool the economy.

But forecasters are still expecting the central bank to raise interest rates at its next interest rate decision on Wednesday.

“The June labour market data was mixed but shouldn’t be enough to prevent the Bank of Canada from following through with a second straight 25 basis point interest rate hike at the next policy decision next week,” Janzen said.

The central bank opted to end its pause on rate hikes in June after a string of economic data suggested interest rates weren’t high enough.

The quarter percentage point rate hike brought its key rate to 4.75 per cent, the highest it’s been since 2001.

The central bank has said repeatedly that Canada’s hot labour market is contributing to high inflation, raising concerns about the pace of wage growth in particular.

However, Statistics Canada said wage growth also softened last month, rising 4.2 per cent from a year ago. That compared with a year-over-year gain of 5.1 per cent in May.

The central bank hasn’t given any clear indication of its plans, saying it will make its decision based on the economic data.

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