Strong July hiring clouds September rate call outlook
Canada's economy had a surprisingly resilient July, adding more than 75,000 jobs and far outpacing forecasts. But while that points to a stronger than expected economic performance, the Bank of Canada still looks likely to continue its wait-and-see approach as it weighs up the impact of the Iran conflict on inflation and the price outlook.
Dominion Lending Centres Group (DLCG) chief economist Sherry Cooper said in a new analysis that the BoC's rate strategy isn't set to change in its next decision in September, although a hike down the line is a real possibility.
"With wage growth decelerating further and energy prices more moderate, the Bank of Canada won't take on a more hawkish tone yet, though a strengthening economic backdrop could eventually push it in that direction if it persists," Cooper wrote.
The unemployment rate dropped in July to 6.4%, its lowest level since July 2024, further complicating the outlook for the Bank of Canada's next interest rate decision.
Jobs data beats forecasts
Employment increased by 0.4% in July, and the employment rate rose 0.1 percentage points to 60.9%. Employment rose among core-aged people 25 to 54 years old, mostly for women in that age group. Private-sector employment increased by about 58,000, while the number of self-employed workers rose by about 44,000, partly offset by a decline of about 27,000 in public-sector employment.
Ontario added the most jobs of any province in July, with 52,000, an increase of 0.6%, while British Columbia added 18,000. Nationally, employment gains were concentrated in wholesale and retail trade, finance, insurance, real estate, rental and leasing, professional, scientific and technical services, and construction.
Average hourly wages among employees rose 2.8% year over year in July, down from 3.3% in June.
CIBC senior economist Andrew Grantham said the report exceeded expectations. "It's stronger growth than we were maybe anticipating a few months ago," Grantham said in an interview with The Canadian Press.
Bond yields further cloud rate change
The strong jobs data lands weeks after the Bank of Canada's most recent decision. On July 15, the Bank of Canada held its policy rate at 2.25% for the sixth time in a row, leaving bank prime rates at 4.45%, excluding lender discounts on variable mortgage rates.
The July statement dropped the Bank's previous explicit warning about possible consecutive rate hikes, while saying the current policy rate remained appropriate and that the Bank was prepared to adjust monetary policy as needed. It also said uncertainty remained high because of the Middle East conflict and US trade policy. Bond markets currently price a high probability of no change at the Bank's next decision on Sept. 2, with a 1% probability of a 25-basis-point hike.
RBC assistant chief economist Nathan Janzen said the labour market has not yet fully normalized despite the July gains. "The labour market is not yet strong — the unemployment rate is still higher than normal, and wage growth slowed in July," Janzen wrote, adding that conditions have nonetheless improved even amid persistent US tariff uncertainty and elevated energy prices.
Fixed mortgage rates continue to track bond yields rather than the overnight rate directly. The five-year Government of Canada benchmark bond yield stood at roughly 3.18% in July, while the Bank of Canada's overnight target rate has remained unchanged since October 2025.
Looming trade tension adds another layer of uncertainty for brokers. Labour outcomes in Canada and the US have diverged of late, with hiring in Canada flourishing over the late spring and early summer even as the US labour market showed signs of weakening in the same period.
