Skip to main content

Sustained jobs growth could push BoC to raise rates again, economists warn


Employment in Canada showed modest growth in February after months of strong jobs gains, raising concerns that a bustling labour market could lead to more interest rate hikes.

In its labour force survey Friday, Statistics Canada said the economy added 22,000 jobs last month, with employment up in the private sector.

The federal agency said the country's unemployment rate held steady at five per cent, hovering near record-lows.

The bulk of the job gains were made in health care and social assistance, public administration and utilities. Meanwhile, jobs were lost in business, building and other support services.

In January, the economy added 150,000 jobs, beating out forecasts significantly.

Though conditions in the labour market remain quite good -- with unemployment just above the all-time low of 4.9 per cent -- Statistics Canada's latest report showed a return to more modest employment growth.

Still, the ongoing strength in the labour market is making many economists nervous about the chance of more rate hikes.

Although the jobs gains are less than previous months, TD's director of economics James Orlando said it's still "too high."

"This is a concern because it means higher wages, which can feed through to higher inflation, and it could derail the Bank of Canada's efforts to bring inflation down," Orlando said.

Unemployment is still expected to rise in the coming months as high interest rates take the steam out of spending, slowing the economy.

Signs of that slowdown are already apparent. In the fourth quarter, the Canadian economy was treading water, posting zero per cent growth.

But Orlando cautioned against focusing only on the headline growth rate. Beneath that number was an uptick in consumer spending, suggesting high interest rates are not bogging down consumers.

The economist said the concern isn't just that interest rates are taking a long time to affect the economy.

"It looks like there's a resurgence in some of this data, specifically in the labour market and in the Canadian consumer," he said.

"The Bank of Canada needs to see a turn in the economy. We cannot keep getting job growth."

With affordability top-of-mind for many Canadians, the latest jobs report shows the gap between wage growth and inflation is narrowing. Average hourly wages were up 5.4 per cent in February compared with a year ago while annual inflation rate was 5.9 per cent in January.

The Bank of Canada, which is working to bring down the country's high inflation rate, has raised concerns that sustained four to five per cent wage growth will make it harder to return to its two per cent inflation target.

In a speech on Thursday, senior deputy governor Carolyn Rogers doubled down on this point, noting labour productivity would have to rise for wage growth to not fuel inflation.

"Labour productivity fell for a third straight quarter, so productivity isn't trending in the right direction so far," Rogers said.

Labour productivity refers to how much output a worker produces. But increasing labour productivity doesn't mean having people work harder, said University of Waterloo economics professor Mikal Skuterud.

It's about equipping them with technology and skills that makes them work better.

"The challenge for the bank is trying to figure out how much of the wage growth is truly productivity and how much is just kind of wage inflation," he said.

The Bank of Canada's concern over labour market tightness has been met with rebuke from labour unions, who says the central bank is working against workers' interests.

Skuterud said there is "very good reason" why the Bank of Canada is prioritizing reducing inflation. But it's policies also have welfare implications as well, he said.

And as workers continue to see their wages lag inflation, Skuterud said workers are losing out.

"There's every reason to be upset. No question," he said.

The effect of higher interest rates on the labour market is expected to play out in the coming months as the Bank of Canada held its key rate steady at 4.5 per cent, the highest it's been since 2007.

Though high interest rates have already taken a toll, the full effect is still ahead, as economists estimate it can take up to two years for rate hikes to be digested by the economy.

This report by The Canadian Press was first published March 10, 2023. Top Stories

Local Spotlight

Stay Connected