Financial markets are currently expecting the Bank of Canada (BoC) to resume rate hikes at some point this year, but CIBC World Markets Inc. says that signs of slack in the job market suggest that it will likely be mid-2027 before the bank needs to tighten.
In a report, CIBC economists argue that current labour market conditions — including a jobless rate that’s now a full percentage point higher than its pre-pandemic level — indicate that there’s room for economic growth to continue before inflation rears its head.
“Measures of labour market slack that are broader than the unemployment rate alone suggest that there is more room for non-inflationary gains in employment ahead, and cooling compensation data also support that assessment,” it said.
For instance, the labour force participation rate remains weak among young people, it noted — as rising unemployment in this group has discouraged prospective workers from looking for work. This, in turn, represents untapped labour supply.
“If more young people engage in the labour market as the economy recovers, it will be easier to fill job vacancies without sparking an acceleration in wage inflation,” the report said. “It would also slow the unemployment rate’s recovery back to levels which we feel are consistent with a 2% inflation target.”
Additionally, there are indications that the level where declining unemployment triggers wage pressures — the non-accelerating inflation rate of unemployment (NAIRU) — has dropped in recent months, after rising in the wake of the pandemic, it noted.
“… it is notable that the modest decline in unemployment relative to its mid-2025 peak hasn’t coincided with higher overall demand for labour. In fact, job vacancies have if anything continued to drift lower,” it said.
Instead, the recent decline in the jobless rate likely reflects “a structural improvement in job-matching rather than just a cyclical upturn in demand for labour,” it said — including changes in immigration policy that may produce better matches between immigrants and job openings, demographics and sectoral shifts that reduce short-term unemployment.
“In reality, we will only really know where NAIRU lies when we see it — when broad wage inflation starts to accelerate again,” the report said.
For now though, wage growth pressures aren’t apparent, and there appears to be “plenty of room for … non-inflationary job gains,” it said.
Against that backdrop, the report said the BoC likely won’t need to tighten rates until mid-2027, rather than by the end of this year.