Bank of Canada officials were increasingly concerned about potential risk of consumption slowdown amid growing slack in the labor market and excess supply in the economy when they cut interest rate during July 24 meeting, the central bank’s summary of deliberations showed.
The central bank’s officials still expected consumer expenditures to strengthen next year given strong population growth, even though it’s assumed to slow soon. Nonetheless, quite a number of risk factors that may challenge their expectation were mentioned in the minutes.
Fear of growing labor market slack
Top of their mind was the risk of further weakness in the labor market. Governing Council members noticed that slack was growing in the job market, citing evidence such as new entrants to the labor force found harder to land a job, job vacancies returned to historical average and Canadian Survey of Consumer Expectations had indicated increased pessimism on job prospects.
Continued job market slack can build up excess supply in the economy which only will “delay the rebound in consumption” but also insert downward pressure on growth and inflation, central bank officials worried.
Economic rebound remains baseline BoC’s forecast
Nevertheless, the Governing Council’s baseline is still that excess supply will gradually be absorbed as GDP growth picks up and potential growth moderates due to slower population growth. Canada’s GDP is forecasted to grow 2.1% in 2025 and even faster at 2.4% in 2026, from the expected rate of 1.2% this year, according to the Bank’s July Monetary Policy Report.
During press conference after July 24 meeting, Bank of Canada Governor Tiff Macklem said that the Canadian economy have not experienced “big losses in labor market” of yet but just slower hiring. He added that the central bank “want to see growth pick up and job market strengthen” to combat downside risks on economic growth as well as inflation.
Cover Photo via Bank of Canada’s Flickr
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