Could a strong labour market mean another rate hike is on the way?

Jobs growth in Canada continues at a rapid pace despite the Bank of Canada’s efforts to cool the economy

Could a strong labour market mean another rate hike is on the way?

Overall inflation continues to trend in the right direction in the Bank of Canada’s eyes – but could a resilient labour market be giving the central bank cause for concern?

The Canadian economy added 41,000 jobs last month, according to newly released figures by the national statistics agency, in a further sign of robust hiring conditions across the country.

The result was more than double the figure expected in a recent Bloomberg survey, which saw respondents anticipate the addition of 20,000 jobs in April, and marked the eighth month in a row that the labour market has posted gains.

That continued strength arrives at what could be a crucial point in the Bank of Canada’s deliberations on whether to keep interest rates where they are or hike further. The central bank has indicated that it’s prepared to leave rates untouched if economic trends play out as expected for the rest of the year – but an unexpectedly healthy jobs outlook for the coming months may complicate its approach.

In its last announcement on interest rates, the Bank highlighted the risk that elevated wage growth keeps inflation expectations higher for longer, with service price inflation and corporate pricing behaviour also posing a threat to its plans to return annual price growth back to the 2% target.

That possibility could lead to another rate increase, it indicated, with the Bank “remaining prepared” to move its policy rate further to continue bringing inflation down.

How has the Bank of Canada’s approach impacted the housing and mortgage markets?

The Bank’s decision to hit pause on rate hikes in March had big implications for Canada’s housing market, according to a leading mortgage executive, who also highlighted the enormous significance of its decisions for the remainder of the year.

Speaking to Canadian Mortgage Professional, Sadiq Boodoo (pictured top), president of Approved Financial, said the central bank’s March pause on hikes had been “what everybody was waiting for,” with many would-be buyers having held their fire on pushing ahead with a purchase while they waited to see how high rates would eventually rise.

“With low inventory, the timeframe from preapproval to purchasing can be lengthy, where [buyers] may have to get preapproved a couple of times, because the first preapproval expired or whatever,” he said. “And if rates are going up, their buying power might shift.

“Today they [might] qualify for a $750,000 purchase and their preapproval expires, they haven’t found anything – they go back to get preapproved again, and rates have changed and now they’re down to $700,000 or $680,000.”

For those buyers, finding a suitable was already difficult at their higher preapproval limit, Boodoo said, meaning that many decided to “wait until the dust settles” and see where the Bank’s policy rate would land before re-entering the market.

What’s next for Canadian inflation?

Recent weeks have seen prominent observers including CIBC deputy chief economist Benjamin Tal suggest that Canada’s annual inflation rate is actually much closer to the central bank’s 2% target than figures indicate.

That’s because while higher mortgage interest payments are added to the overall inflation figure, they’re caused by the Bank of Canada’s rate hikes – meaning they’re effectively counterbalanced by a disinflationary force.

Boodoo reinforced that argument, noting that inflation may fall more rapidly – and further – than planned by the Bank of Canada because of those competing forces.

At last reading in March, the consumer price index (CPI), which measures annual price changes across a range of sectors, sat at 4.3%.

“Housings costs are part of the inflation [rate], and obviously higher mortgage rates feed into higher housing costs,” he said. “If we back that out, we’re at about 3%. So we’re only up 1% higher than the government’s target – and we still haven’t seen the full effect of all their rate increases yet because it takes eight to 12 months for [that] to take place.

“So I think we may end up seeing a situation where the government overshot the rate increases and our true inflation adjusted for those rate increases comes down even below the 2% mark.”

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