November’s jobs report delivered mixed signals: while employment growth exceeded expectations, the unemployment rate rose sharply to 6.8 per cent. This surge reflects a significant influx of workers entering the labour market, boosting the participation rate to 65.1 per cent.
These dynamics – a higher unemployment rate, a higher participation rate and slowing wage growth – point to higher slack in the labour market. As a result, market expectations have shifted, with consensus now leaning toward a 50 basis point rate cut by the Bank of Canada this week. The rationale is clear: a labour market with more slack, coupled with downside risk from slower population growth and a sluggish economy, requires the Bank to act more aggressively.
The caveat to this is how the Bank sees the market interpreting its actions. In the last Monetary Policy Committee meeting, some members voiced concern that a larger rate cut could be interpreted as a sign of “panic.” Two consecutive 50-basis point cuts could undermine market confidence and signal that the Bank has fallen behind the curve.
The immediate decision – whether the Bank cuts by 25 or 50 basis points – is just one piece of the puzzle. The bigger question is where the easing cycle ultimately lands. This depends largely on the neutral rate, which the Bank of Canada estimates to be in the 2.25 per cent to 3.25 per cent range. With the risk of a sharp decline in potential growth over the next two years, there is a good chance the neutral rate will shift toward the lower end of this range.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Tax policies like vacant home taxes are often seen as solutions to address Canada’s housing affordability crisis, but do they really address the root cause? Recent data from Statistics Canada shows that property flipping is a small, low-profit activity. Meanwhile, new taxes like Toronto’s vacant home tax raise administrative concerns and may not improve affordability.
Read more in the latest Housing Affordability Watch: Tax Policy Illusions
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