Bank of Canada rate hike in December in doubt due to weak job market, economist says

Canada’s unemployment rate rose to 6.7 per cent as the economy failed in October to recover from heavy job losses in the previous two months, leaving economists to wonder how much more bad news the Bank of Canada can take before it stops thinking about hiking interest rates.

The economy shed 4,700 positions last month, missing economists’ estimates for a gain of 15,000 and for the jobless rate to hold at 6.5 per cent, according to data from Bloomberg.

Here’s what economists had to say about the latest numbers and what they mean for the Bank of Canada and interest rates.

‘How fast, how far’: Bank of Montreal

Bank of Montreal chief economist Douglas Porter gave the October job report a score of 37 out of 100, calling it “another fail” because it came on top of 110,000 positions lost in August and September.

“Employment is now up a measly 0.1 per cent from year-ago levels,” he said in a note on Friday, adding the only reason the unemployment rate isn’t higher is because population growth slowed.

The weakness in the job market also comes in sharp contrast to the strength in the United States, putting more pressure on the Bank of Canada to temper its next moves on interest rates and on the U.S. Federal Reserve to hike.

“Not to belabour the point too much, but the persistent weakness in employment raises fresh questions about how fast and far the Bank of Canada should be raising rates,” he said.

‘Hard to ignore’: CIBC

“While the Canadian Labour Force Survey is notoriously volatile, three monthly declines in a row is a trend that is hard to ignore,” Andrew Grantham, a senior economist at CIBC Capital Markets, said in a note.

He pointed to job losses in several sectors, including wholesale and retail and transportation and warehousing, with the latter taking a hit from the escalation in the trade war with the U.S. from late August into September.

One more Labour Force Survey comes out before the Bank of Canada’s next interest rate meeting on Dec. 6.

Grantham said the cumulative picture points to ongoing slack in the economy, which “supports” the Bank of Canada holding next month.

‘Hike rates twice’: Capital Economics

“The further contraction in employment in October and rise in the unemployment rate sit awkwardly with (Tiff) Macklem’s comments … that the economy is ‘showing impressive resilience,'” Thomas Ryan, senior North America economist at Capital Economics Ltd., said in a note on Friday.

The governor of the Bank of Canada told MPs at a House of Commons finance committee meeting this week that policymakers could no longer ignore the threat high fuel prices pose for inflation.

The central bank’s mandate is to hold inflation as close as possible to its two per cent target, using interest rates to achieve that.

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Ryan said major job losses in August and September could be partly explained by some temporary factors, but the losses in October are harder to explain, given that most of the losses were in the private sector while public-sector employment increased.

He said the rise in the unemployment rate to a six-month high is the most alarming element in Statistics Canada’s report, which coupled with “muted” wage growth signals there is employment slack, a symptom of weak economic activity.

“Ultimately, this adds to our conviction that the Bank of Canada will hike rates no more than twice more as a precaution against upside inflation risks before calling it a day,” he said.