National Bank Experts Say Drop in Canada’s Unemployment Rate Will Not Lead to Interest Rate Cut

Canada’s unemployment rate dropped to 5.7 percent last month, marking the first decline since December 2022, according to newly released data from Statistics Canada. And that larger-than-expected employment gain will not convince the Bank of Canada to cut interest rates any time soon, economists say.

StatCan’s labour force survey showed 37,000 additional jobs were added to the economy in January after three months of “little change.”

Canada’s labour market slowed significantly in 2023 as high interest rates took a toll on consumer spending and business investment, elevating the unemployment rate from 5.1 percent in April to 5.8 percent in December.

Although the latest job gains were driven by an increase in part-time work, employment growth exceeded forecasters’ expectations, suggesting the Bank of Canada won’t feel the need to cut rates any time soon.

“The Bank of Canada won’t change course after today’s report,” TD director and senior economist James Orlando wrote. “The data are simply too volatile and don’t paint a clear picture of the state of the Canadian economy. This leaves the BoC to continue fixating on the state of inflation.”

Bank of Montreal chief economist Douglas Porter agreed, referencing StatCan data that showed average hourly wages rose 5.3 percent from a year ago.

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“A decent job gain, a slide in the jobless rate, and persistent 5 percent wage growth are hardly the stuff of an urgent call for rate cuts,” Mr. Porter said in a note. “The Bank of Canada is likely to view this report as further reason for a patient policy stance.”

StatCan said wage growth was more prominent among women and high-income earners. Men continue to earn more than women on average, but average hourly wages rose 6.2 percent among female workers compared with 4.4 percent among male employees.

Employees in the top 25 percent of the wage distribution enjoyed a 5.9 percent growth in compensation compared with 4.6 percent for those in the bottom 25 percent.

With employment rates on the rise again, jobs have increased in several sectors including wholesale and retail trade as well as finance, insurance, real estate, rental, and leasing, StatCan data showed. On the other side of the coin, the largest employment decline was in accommodation and food services.

Canada’s labour market has been supported by strong population growth, driven by permanent and temporary immigration.

Compared with a year ago, the economy added 345,000 jobs, while the working-age population expanded by 1 million people.

As the Bank of Canada maintains its key interest rate at 5 percent, economists’ forecasts suggest unemployment will rise throughout this year.

The Canadian Press contributed to this report.