Bank of Canada expected to raise rates despite rise in unemployment

The Canadian labour market is showing some signs of softening as the unemployment rate rises and wage growth slows, but with another solid job gain in June, forecasters are still expecting an interest rate hike by the Bank of Canada next week.

Statistics Canada reported Friday the economy added 60,000 jobs in June, driven by gains in full-time work.

But as more Canadians searched for work and the population continued to grow, the unemployment rate climbed higher to 5.4%, the highest it’s been in more than a year.

“The reason the unemployment rate can rise alongside historically strong employment growth is that population growth continues to set new records — including an 84,000 monthly increase in June,” wrote RBC assistant chief economist Nathan Janzen in a note to clients.

June marked the second month in a row the unemployment rate has risen as economists watch for softening in the labour market amid high interest rates.

At the same time, employers’ hiring appetite bounced back in June after the economy lost 17,000 jobs in May.

“Overall, the job growth that we saw this month puts this report on the positive side, just not anything that we should get excited about,” said Brendon Bernard, a senior economist at hiring website Indeed.

Job gains were concentrated in wholesale and retail trade, manufacturing, health care and social assistance and transportation and warehousing.

Though signs of loosening in the labour market likely come as good news to the Bank of Canada, forecasters are still expecting the central bank to raise rates at its next interest rate decision on Wednesday.

“The June labour market data was mixed but shouldn’t be enough to prevent the Bank of Canada from following through with a second straight 25 basis point interest rate hike at the next policy decision next week,” Janzen wrote.

The central bank opted to end its pause on rate hikes in June after a string of economic data suggested its aggressive interest rate hikes weren’t cooling the economy fast enough. The quarter percentage point rate hike brought its key rate to 4.75%, the highest it’s been since 2001.

The central bank has said future rate decisions will be based on economic data.

The Bank of Canada has repeatedly said that the country’s hot labour market is contributing to high inflation, raising concerns about the pace of wage growth in particular and whether it could prop up inflation over the longer term.

However, Statistics Canada said wage growth also softened last month, rising 4.2% from a year ago. That’s compared with a year-over-year gain of 5.1% in May.

Workers’ wages are rising faster than inflation, which was 3.4% in May. But Bernard said the slowdown in wage growth may mean it will take longer for workers to make up for their lost purchasing power during this inflationary period.

Bernard said lower inflation in recent months may actually be helping cool wage growth. The labour economist said employers may be using the lower rates of inflation as a justification for lower pay raises in negotiations with job seekers and employees.

“Now that overall prices at least have shown signs of slowing, maybe some employers will take that to the bargaining table when they’re negotiating with job seekers or their existing employees,” Bernard said.