Bank of Canada rate cut obstacles are fading — except for this one

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When the Bank of Canada made its first interest rate cut last month there were three risks economists cited that could stall the cycle — the Canadian dollar, the housing market and wage growth.

Douglas Porter, chief economist at BMO Capital Markets, checked in on these potential stumbling blocks on Friday in his weekly column Talking Points to determine how we were doing.

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“To quote Mr. Loaf: Two out of three ain’t bad … but is it good enough,” said Porter.

The big concern around the Canadian dollar was that the Bank of Canada moving ahead of the United States Federal Reserve would cause the currency to plunge.

Yet in recent weeks the loonie has been “remarkably well behaved,” said Porter. After a soft start in the first three months of the year, the loonie appears to have found some stability at around 73.5 US cents. A weaker greenback as the U.S. economy softens and the prospect of Fed rate cuts have helped steady the currency.

Nor has the housing market flared up again as some predicted. Porter said real estate data from Canada’s major cities last week showed little pickup in activity even after the interest rate cut last month.

“The data support the initial view that it was actually sellers who stepped up, not buyers, after the bank moved,” he said.

Sales were down by the double digits in many cities from a year ago and big increases to inventories are shifting the balance in buyers’ favour.

“While sellers and the real estate industry may not like it, the reality is that a sleepy housing market may be exactly what policymakers would like to see at this point, and it also holds out the tantalizing potential of some improvement in extremely strained affordability,” he said.

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However, wage growth remains a fly in the ointment. Jobs data out Friday showed that while the labour market had loosened in June, average hourly wages accelerated to 5.4 per cent.

“As a standalone result, the softening job market raises the odds of a Bank of Canada rate cut. However, wages remain the very definition of sticky, which will give the Bank pause,” said Porter in a note after the data was released.

So how much of a concern is this?

June’s pick-up in wage growth was largely due to base-effects from a low reading a year ago, said Toronto Dominion economist Marc Ercolao.

“Still, it doesn’t take away from the fact wages have been growing at around 5 per cent year-on-year for the past 18-months while productivity dipped over the same period,” he said.

Wage growth was on the governing council’s mind when it meet last month, deliberations show, but governor Tiff Macklem appeared to soften those concerns in a speech last week.

“The fact that wages are moderating more slowly than inflation is not surprising; wages tend to lag adjustments in employment,” Macklem said. “Going forward, we will be looking for wage growth to moderate further.”

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Is two out of three enough, then?

After Friday’s job numbers, markets are betting on a 60 per cent probability of an interest rate cut on July 24, while a Bloomberg survey suggests the majority of economists expect a hold until Sept. 4.

And there is more data to come.

A crucial inflation reading on July 16 and the Bank of Canada’s own Business Outlook survey will still shape the central bank’s view of whether to cut or hold this month.

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Canada’s unemployment rate hit 6.4 per cent in June, the highest reading since 2017, outside of the pandemic, data showed Friday.

Much of that increase came from students, whose jobless rate hit 13.5 per cent, the highest since 2014, but layoffs were also up 20 per cent from a year ago, said Nathan Janzen, assistant chief economist for Royal Bank of Canada.

The economy lost about 1,000 jobs after 2,000 part-time positions were added, but 3,000 full-time jobs were lost.

• Today’s Data: United States consumer credit

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McLister on mortgages

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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