Friday’s blowout jobs number has most economists convinced that the Bank of Canada will have to raise rates at its next meeting on July 20.

Expectations were for about 20,000 new jobs to be created in June, but the economy cranked out more than 90,000 new jobs, according to Statistics Canada.


“This morning’s job report in Canada was very impressive,” says National Bank Financial, noting that the level of total employment has now recovered its pre-recession peak.

And, as a result, NBF believes that the central bank will have to raise rates at its next meeting. “Deep negative real policy rates helped restore domestic demand since the end of the recession. Now that the goal has been achieved, such a policy is no longer warranted,” NBF says. “Although the tone of the latest press release by the Bank of Canada was particularly oriented toward the international situation, it is now time for the [Bank] to set policy based on domestic developments. An increase in rates in July is probably more than just in the cards. In our opinion, it is probably already a done deal.”

NBF is not alone in that call. In fact, it is emerging as the consensus opinion among economists in the wake of Friday’s report.

“To be sure, the volatility in financial markets associated with the European sovereign-debt crisis has boosted worries about the global economic outlook; however, the performance of the domestic economy and the very strong labour market favours the Bank acting again later this month,” says RBC Economics.

“With Canada’s recovery firmly rooted, the need for an extraordinarily low overnight rate is quickly diminishing; therefore, we expect the Bank gradually and steadily to reduce the amount of policy accommodation unless another flare-up in global financial markets damages confidence and threatens the economy’s growth momentum.”

TD also sees the Bank hiking by 25 basis points at its next meeting, as does BMO Capital Markets, and CIBC World Markets.

“We continue to expect the Bank of Canada to keep a bias towards tightening, with a 25 bps rate increase in July followed by two more 25 bps moves before the year is out,” says CIBC. “However, a pause in rate hikes by the end of the year is likely if, as we expect, a likely US slowdown in the second half of the year, coupled with fading fiscal stimulus restrain Canada’s growth, and keep the unemployment rate sticky near current levels.”

One contrarian voice in all of this clamour for rate hikes is Gluskin Sheff + Associates Inc.’s chief economist, David Rosenberg, who points out two weak spots in the report: despite the big job gains, hours worked declined by 0.25% in June, and average hourly earnings also fell 0.6% from the previous month.

He points out that wages have now deflated in Canada for four of the past five months, and average pay is down to its lowest level in nine months. “Average weekly worker-based pay has basically stagnated since February — this may be something the folks at the central bank may want to concern themselves with from a deflationary standpoint,” he says. “More jobs, less pay, should not necessarily equate to higher interest rates.”

Moreover, he points out that the drop in hours worked also signals that the job market may not be as rosy as the headline numbers suggest. “It is quite normal, in fact, for the hours worked data to lead the employment data by between three-and-six months, so those who like to look at the economy through the front window as opposed to the rear-view mirror may want to keep this little factoid in the glove compartment. Hours lead bodies,” he says.

“As an aside, and this may just take more than a little sheen off the headline data, but a 0.25% cut in the workweek is equivalent to a 43,000 job cut. In other words, the decline in hours was equivalent to wiping out nearly half of the headline employment gain,” he adds.

IE