It comes as the Bank of Canada is likely to hold the line on its key interest rate. This decision comes as trade uncertainties still hang in the air, most notably after recent events in the Canadian economy. In its April monetary policy report, the central bank decided against releasing a typical economic outlook. Rather, it laid out two economic outlooks to show how the tariffs are apt to affect the economy.
In June, Statistics Canada said the surge in employment was by far the largest ever recorded, as the Canadian economy added 83,000 jobs. This expansion added over one million jobs to the labor market in the process. As a result, the unemployment rate fell for the first time since January. Yet the BoC’s move in June to stop easing further was brought about by an ongoing inflationary supply shock.
Trade Uncertainties and Economic Scenarios
Without the usual forward-looking forecast from the Bank of Canada, these questions leave a lot of uncertainty about the future economic landscape. Those are two of the scenarios the central bank investigated in its April 2019 Beige Book, an analysis of how tariffs might ripple through the economy. Analysts, like Jimmy Jean, chief economist at Desjardins, have fiercely disputed that the current tariff war with the United States is forcing an economic contraction. Furthermore, they claim that this effect has already been realized in the second quarter.
Jean underscored the dangers that Trump’s sectoral tariffs have created for Ontario and Quebec. These tariffs are aimed directly at Canada’s steel, aluminum, and copper industries. He noted, “The uncertainty is there for everyone to recognize. There’s a point where you’ve got to sort of, stick your neck out and make the proper caveats.”
The Bank now faces a complicated decision-making process further clouded by the ongoing trade dispute. It needs to thread the needle on economic expansion with inflation fighting.
Labor Market Insights and Inflation Trends
Despite recent job gains, experts caution that the labor market remains broadly weak, with an unemployment rate of 6.9 percent, according to Avery Shenfeld. He stated, “I think at this point they know enough to rule out the worst-case scenario on trade.” This perspective indicates that while there are challenges ahead, there is a recognition that conditions may not deteriorate as severely as some had previously feared.
It follows StatCan’s report last week that annual inflation hit 1.9 percent last month. Yet at the same time, core inflation is holding pretty steady at three percent. These figures suggest that inflationary pressures persist, complicating the central bank’s efforts to maintain stability in an uncertain environment.
Jean was encouraged by the cautious optimism expressed in the monetary policy decision. For starters, he noted that financial markets are pricing in just a seven percent likelihood of a quarter-point rate cut. Yet, he thinks there are good reasons to predict further changes in the future. “We think, despite those measures being in the pipeline, the Bank of Canada will still in September have a valid reason to cut interest rates,” he stated.
Future Projections and Market Reactions
Market analysts predict the BoC will get back to their written forward guidance. This significant shift will be explained in detail in the next Monetary Policy Report (MPR). Most recently, CIBC projected the BoC will initiate two rate cuts in the next few months. Each still appears likely to be a quarter-point cut. This prediction underscores the prevailing sentiment that while the labor market shows signs of recovery, underlying economic pressures necessitate close monitoring.
Jean further highlighted that the Bank of Canada would have room to make a rate cut in September. To their credit, this decision is still an “open option.” He remarked on the complexities facing policymakers, stating, “There’s always a chance that they’ll surprise with the rate cut,” although he tempered his enthusiasm by adding, “I’m not holding out that much hope.”
Both industry and climate observers are closely watching Wednesday’s announcement from the Bank of Canada. They are particularly interested in understanding how key economic indicators and ongoing trade negotiations will affect future monetary policy.
