how much will they cut? part I

There is much anticipation around the Bank of Canada’s next interest rate announcement on October 23rd. And while there is broad consensus that the Bank will further reduce its policy rate (a sentiment we strongly share), the big question that remains is whether the Bank will trim another 25 basis points or if they will opt for a so-called 50-basis-point “jumbo cut”. There is plenty of evidence that the Bank needs to lower its trend-setting rate, including that inflation is back to target, rent inflation is likely lower than its CPI reading, and the labour market has been weak, among others. 

Before the governors of the Bank of Canada meet, however, there are two notable data releases from Statistics Canada that could impact the rate decision: an inflation update from the Consumer Price Index (CPI) on October 15th, and today’s jobs update from the Labour Force Survey (LFS).

What the first of these releases show us is a labour market in September that bucked some of its longer-term trends and showed a bit of resilience. Canada added a solid 46,700 jobs last month, while the number of unemployed people in the labour force declined by 30,800. What’s more, the gains came in the form of full-time jobs (+112,000), while part-time employment fell (-65,300).

The downside of September’s reading came in the form of labour force participation, which at 64.9% fell to its lowest level since December 1997 (outside of the pandemic). Similarly, the employment rate fell last month to 60.7%, its lowest level (excluding the pandemic) since July 1999.

Overall, the data describe a labour market that fared reasonably well in September, but is still relatively weak overall. The unemployment rate may have declined last month, but is still elevated at 6.5%. That the participation rate is at a 25-year low and declining is cause for concern as well. Ultimately though, the latest LFS data won’t add any urgency to the Bank’s decision and likely increases the odds of a 25-basis-point cut. The September CPI data will give us (and the Bank) a clearer picture, so stay tuned to this space for part II of “how much will they cut”, coming on October 15th.