BoC might have to rethink rate pause as unemployment remains very low: economists

The labour market is showing no signs of the slowdown the Bank of Canada is hoping for to get inflation down to 2%, something economists say could force the central bank to get off the sidelines and raise rates again.

Statistics Canada’s latest labour force survey revealed Friday the economy continued to add jobs in April while wage growth outpaced inflation.

Employment rose by 41,000 jobs in April, but with all the gains made in part-time work.

Meanwhile, the unemployment rate held steady at 5.0% for the fifth consecutive month. That’s just above the all-time low of 4.9% reached last summer.

In a client note sent out Friday morning, BMO chief economist Douglas Porter said the latest jobs report once again shows “no evidence that the labour market is softening at all.”

“If this persists through the spring, the Bank of Canada may yet be forced to rethink its rate pause, especially with the housing market showing signs of reviving.”

The Bank of Canada paused its interest rate hiking cycle earlier this year, encouraged by slowing inflation. With its key interest rate sitting at 4.5%, higher borrowing costs should force people and businesses to pull back on spending, and employers to rethink their hiring plans.

But so far, the labour market has remained resilient, despite previous forecasts for the economy predicting a slowdown to start the year.

The central bank has been warning that a tight labour market will make it more difficult to get inflation back to its target of 2%, as higher wages could put upward pressure on prices.

TD director of economics James Orlando said the details in the jobs report are “mixed.” The economy continued to add jobs, but only part-time work. Moreover, population growth has been propping up employment numbers for months as Canada welcomes more immigrants.

And although the unemployment rate hasn’t budged, Orlando said there are signs that hiring isn’t happening as broadly in the economy.

“In the last three months, we went from almost 90% of sectors hiring to 69% of sectors hiring right now,” he said.

The job gains in April were led by the wholesale and retail trade industry, while the largest losses occurred in business, building and other support services.

The tight labour market is also putting upward pressure on wages. Average hourly wages were up 5.2% on a year-over-year basis, growing faster than inflation.

The annual inflation rate in March was 4.3% and is expected to fall to about 3% by mid-year.

High wage growth is pushing the Bank of Canada to remain hawkish in its communications on monetary policy, even as it holds its key interest rate steady.

During a speech on Thursday at the Toronto Region Board of Trade, Bank of Canada governor Tiff Macklem addressed the labour market tightness.

“Most wage growth measures remain around the four to five per cent range. Unless productivity growth surprises us with a strong increase, persistent wage growth in that range will make it difficult to achieve the two per cent inflation target,” Macklem said.

Last month, the Bank of Canada’ governing council discussed raising rates again, but opted to remain on hold.

Orlando said if the economy continues to resist the slowdown the Bank of Canada is trying to engineer, interest rates may not be high enough.

“Maybe the Bank of Canada has to reassess what the proper level or the policy rate is to actually bring the economy to the economic slowdown that’s needed to get inflation back (down),” Orlando said.