(Ottawa) The Bank of Canada wants the economy to recover and some members of its governing council fear that weak labour market conditions could hamper that process.
This is according to a recently released document summarizing the deliberations of the central bank’s governing council. It details the discussions leading up to the July 24 decision on the key interest rate.
“With slack in the labour market emerging, some members expressed concern that further weakness in the labour market could delay the rebound in consumption, putting downward pressure on growth and inflation,” the summary said.
As growth in the consumer price index continues to slow, downside risks to inflation assumed greater prominence in these deliberations than in previous ones.
The Bank of Canada has indicated that it will continue to reduce its key interest rate as long as inflation continues to slow in line with its projections.
Its rate currently stands at 4.5%. The next announcement is scheduled for September 4.
“Canadian central bankers felt more urgency to cut rates in July,” said Royce Mendes, managing director and head of macroeconomic strategy at Desjardins, in a note to clients.
“While the Bank of Canada continues to believe that consumer spending will rebound, officials acknowledge the significant risks to this outlook from upcoming mortgage renewals and continued weakness in the labour market.”
The Canadian economy has managed to avoid a recession, even as interest rates reduce consumer and business spending.
However, other indicators suggest the economy is fragile. In fact, it appears to have contracted in proportion to the number of people, the Bank of Canada noted in its summary.
The summary reiterates that the decision to lower the policy rate last month was partly motivated by a desire to stimulate economic growth.
The job market that job seekers benefited from in the aftermath of the COVID-19 pandemic is now much slower.
Employers are reporting fewer labor shortages, and workers entering the labor market have fewer choices.
This has led to a gradual increase in the unemployment rate, which reached 6.4% in June. Statistics Canada is expected to release its July labour force report on Friday.
“We now expect the Bank of Canada to cut its rate at each of its remaining policy decisions in 2024 before reaching our forecast of 2.25 per cent by the end of 2025,” Mendes said.
“We no longer see Canadian central bankers holding steady in December, as we now expect the Fed to also deliver three consecutive 25 (basis point) rate cuts over the remainder of this year.”