Experts highlight potential policy easing as unemployment reaches its highest level in four years
Investors are increasingly betting on Canadian interest rate cuts following disappointing employment data.
Expectations that the Federal Reserve and the Bank of Canada will resume their easing campaigns were given a boost on Friday by disappointing US and Canadian jobs data, according to Reuters. Investors see a roughly 90% chance the BoC will lower its benchmark rate by 25 points on September 17.
Statistics Canada reported that unemployment climbed to 7.1% in August, up 0.2 percentage points from July and representing the highest level in four years. The rate exceeded market expectations of 7%. The number of unemployed people increased to approximately 1.595 million, with youth unemployment remaining particularly elevated at 14.5%.
The concerning employment figures follow two consecutive months of job losses for Canada, intensifying pressure on the central bank to provide economic stimulus through lower borrowing costs.
“September always tends to be a challenging month in terms of seasonal volatility and the biggest factor this month is very likely to be interest rate cuts”, said Elvis Picardo, a portfolio manager at Luft Financial, iA Private Wealth. “The markets are anticipating rate cuts on both sides of the border”.
The Bank of Canada has maintained its policy rate at 2.75% since March, keeping rates steady at its last three meetings as policymakers assessed economic conditions and inflation trends.
Market perspectives on rate cuts shift
Financial markets reflected the shifting monetary policy expectations on Monday, with Canada’s main stock index ending marginally lower as investors engaged in profit-taking following eight consecutive days of gains that pushed the TSX to record levels last week.
The S&P/TSX composite index ended down 22.9 points, or 0.1%, at 29,027.73. It follows eight-straight days of gains that lifted the market to a record closing high on Friday, Reuters reported.
The employment data comes as both Canadian and US central banks face similar economic pressures, with the Federal Reserve also expected to begin cutting rates this month following weak US labour market conditions.
The Canadian situation mirrors challenges facing central banks globally, as Federal Reserve officials in the United States grapple with similar economic pressures. “The soft August jobs report will help drive consensus across the committee that not only should rate cuts resume this month, but that further cuts will likely be appropriate in coming months,” Citigroup economist Andrew Hollenhorst said regarding US conditions, CNBC reported.
Nomura economist David Seif noted that “The August employment report solidifies the case for the Fed to deliver a series of insurance cuts at upcoming meetings,” while warning that “with inflation risks elevated, we expect officials would need to see clearer evidence of labor market stress or a sharp tightening in market financial conditions before delivering more aggressive easing.”
