While last week’s jobs report showed mixed results amid a rising unemployment rate, Holt argues that the Bank of Canada‘s likely justification for a 50-basis point rate cut is driven more by risk management and market expectations than by actual economic weakness.
Market odds that the central bank will deliver a second consecutive half-point cut are now north of 75%.
Holt says the Bank may opt for a risk management approach, prioritizing the risk of inflation dropping below 2% over the potential danger of reigniting inflation with aggressive rate cuts.
Additionally, he adds the BoC may find it easier to meet market expectations of a 50-basis point rate cut rather than risk further disappointment, especially with Macklem’s recent dovish signals and market pricing already factoring in the cut.
While market expectations surged after the November jobs report showed 50.5k new jobs despite a rising unemployment rate of 6.8%, Holt argues that this is not the main reason the Bank of Canada should consider a large rate cut.
“My interpretation of the jobs report strongly counsels against rapid easing,” he wrote, Holt argued that bond traders were overly focused on the rising unemployment rate, which was driven by a 138k increase in the labour force—more than twice the pace of job creation. He pointed out that much of this growth was due to an 80k population increase in the month, with the overall population up by 1.179 million over the past year.
Beyond that, Holt provides further reasons why a 50-bps cut isn’t warranted, including concerns that such a move could boost job growth for temporary workers at the expense of productivity. He also expressed skepticism about the accuracy of StatCan’s seasonal adjustments, which he believes could distort the economic picture.
“If they do upsize again, then I hope there is a much more careful bias, if not an outright signal, that at 3.25% and 175bps below the peak policy rate they are prepared to take a bit of a breather and see how the rest unfolds,” Holt wrote.
What others are saying
While Holt offers a critical perspective on the Bank of Canada’s potential rate cut, other experts have weighed in with varying opinions. Here’s a look at what some are saying about the Bank’s strategy and the broader economic outlook.
More takes on the November jobs report
- Edge Realty Analytics: “We now have 1.5 million unemployed Canadians (+22% y/y), the highest since we had pandemic-related lock-downs in 2021. That includes 87,000 added last month alone, the largest non-COVID related monthly increase since 2009. … What really should have the attention of policymakers is the dramatic increase in the ranks of the long-term unemployed…We now have twice as many workers who have been without a job for 6 months as we had in Q3 of last year, and the annual growth in those who have been unemployed for a full year is now at levels only ever seen 4 times previously…all associated with recessions.”
- National Bank: “On one hand, disappointing Q3 GDP growth and a poor hand-off to Q4 supports another 50-bps move. On the other hand, upward historical GDP revisions, stronger-than-expected inflation and faster wage growth lean towards a 25-bps reduction. Ultimately, we think November’s labour market data will act as the tie breaker and to us, the sharp rise in the jobless rate is a clear sign that the time for restrictive monetary policy is long behind us. We therefore expect the Bank to cut 50 bps for the second straight meeting.”
From those forecasting a 25-bps rate cut…
- TD Economics: “Since the 50-bps rate cut delivered in October, “economic data have shown more resilience, with consumer spending, the real estate market, and price pressures rebounding. Even with the messiness of [November]’s employment report, the economy continues to add jobs, reinforcing our view that the labour market is on solid foundations. We think this should be enough to convince the central bank to revert to a 25-bps cut [this] week, but it will remain a close call for the central bank.”
- Desjardins: “The sharply higher unemployment rate in November masks the strength under the hood of the Canadian labour market. With outsized hiring in the month, CPI inflation having advanced by 2% or less in the three months to October, and Q4 2024 real GDP growth tracking in line with the BoC’s expectations, we remain of the view that the Bank will cut by 25-basis points next week.”
The latest Big bank rate forecasts
The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from our previous table in parentheses.
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Last modified: December 9, 2024
