Economists are turning their attention to the possibility of interest rate cuts in September, following a Canadian jobs report that appears to make a rate cut next week unlikely.

“The June employment data for Canada were much better than expected, dramatically reducing the likelihood that the Bank of Canada will ease next Tuesday,” declares BMO Nesbitt Burns chief economist, Sherry Cooper.

She notes that not only were more jobs created and the jobless rate slipping, compared to the U.S. — but, labour force participation rates are higher in Canada, meaning that there are proportionately fewer discouraged workers here than stateside. “Calculating an augmented unemployment rate by including those that will potentially reenter the job market when things turn up, the relative comparison would be a 9.5% augmented jobless rate in the U.S., compared to only 7.9% in Canada.”

“The Canadian dollar has rallied on this news and the general presumption is that the Bank of Canada will remain on the sidelines on the July 15th policy-statement date,” Cooper says. “This does not, however, preclude rate cuts later this year. That will depend on the incoming Canadian data and the strength of the rebound in the U.S. We would not rule out a rate cut this fall, but it just might not be necessary.”

Cooper’s colleagues at Bank of Montreal are also saying that rates likely stay stable next week. It says that five of the 16 factors the Bank considers in its decisions point to a cut, five point to a hike, and the rest are neutral.

BMO pegs the chance of a cut next week at 35%, rising to 40% for the planned September 3 meeting. “With interest rates already low and the economy likely to rebound later this year, the Bank of Canada is expected to stand pat in the months ahead,” BMO says. “However, the recent economic slowdown and rapid appreciation of the Canadian dollar underscore the significant risk of a rate cut.”

Down the road rates are certainly going higher, BMO says, “Looking further ahead, the Bank is expected to begin raising overnight rates in early 2004 after the economy has turned up in response to stronger US demand. Overnight rates should eventually climb towards more neutral levels of around 5% by mid-2005.”