The Bank of Canada’s next interest rate decision is set for July 30. Some market watchers believe the Bank should be cutting another 25 to 50 basis points this year, while others argue no further cuts are needed. Ultimately, the Bank’s decision will hinge on how growth, employment and core inflation evolve over the coming months.
Canadian real GDP contracted by 0.1 per cent in April, with preliminary estimates pointing to a similar-sized pullback in May. These back-to-back declines aren’t surprising given ongoing market uncertainty, and the expectation is for further weakness in the second and third quarters.
Against this backdrop of slowing growth, labour market data will be a critical signal for the Bank. Two key monthly surveys provide important insight: the Labour Force Survey (LFS) and the Survey of Employment, Payrolls and Hours (SEPH). The LFS offers a broader picture of labour market trends, including employment, unemployment, and labour force characteristics, while the SEPH focuses specifically on payroll employment in non-farm industries, offering detailed data on employment levels, earnings, and hours worked.
The latest SEPH data showed the economy shed 6,000 jobs in April. A closer read reveals the private sector lost 28,000 jobs during the month, marking the fourth consecutive monthly decline in private employment. Over that four month period, 78,000 jobs were lost, with only 15,000 of them in manufacturing, suggesting a broad-based weakening of the economy.
While the LFS is showing stronger job creation outside of export-sensitive sectors, its readings can be affected by changes in population. Specifically, LFS methodology smooths the number of non-permanent residents (NPRs) using a 12-month moving average. When NPR numbers move sharply, this smoothing introduces a lag, causing the LFS to overstate or understate actual population – and by extension, employment – growth. National Bank estimates this effect may have overstated employment gains by more than 50,000 jobs in the first quarter.
At the same time, inflation trends remain a key concern for the Bank. Canadian consumer prices rose 0.6 per cent month-over-month in May (seasonally adjusted), holding headline inflation steady at 1.7 per cent. Core inflation measures showed modest improvement, with both the trim and the median coming in at 3 per cent, slightly better than the previous month. However, expected base effects are not favourable, making further progress on core inflation unlikely in the next CPI reading ahead of the Bank’s upcoming policy decision. Since price levels were already relatively high this time last year, year-over-year comparisons may not show meaningful improvement—even if monthly gains are modest.
Core inflation remains too far above the Bank’s 2 per cent target, leaving little room to ease rates in the near term. While the underlying softness in growth and employment will eventually pave the way for additional rate relief, the stickiness of core inflation remains a significant hurdle.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Ontario’s 2024 update to the Planning Act gives developers the option to use surety bonds instead of letters of credit to guarantee the completion of municipal work, freeing up capital and cutting red tape. It’s a step toward more efficient housing delivery, but a number of challenges remain, including inconsistent frameworks across municipalities.
If Ontario gets this right, it could provide a valuable blueprint for a national housing delivery model. CMHC is in the perfect position to lead the way—so what’s stopping them?
Read the full analysis in our latest Housing Affordability Watch: [Link]
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.
