Canada To Cut Interest Rates Before US As Labor Market Erodes: BMO

The Canadian and US economy are diverging from their typically similar performance. A new research note from BMO warns Canada’s economy is seriously underperforming in contrast to the US, especially when it comes to labor and inflation. This widening divergence likely means Canada will enter a recession and cut rates before the US, where its central bank has even floated the possibility of no rate cuts this year.  

Canadian Labor Market Eroding Much Faster Than The US

Canada and the US typically have labor markets that move closely but not these days. The US economy gained 303,000 jobs and saw its unemployment rate fall to just 3.8% last month. Meanwhile in Canada, it lost 2,200 jobs and saw the unemployment rate climb 0.3 points to 6.1% over the same period. According to BMO, the 2.3 point gap for unemployment in both countries is on the high side for anything seen over the past 20 years. 

“Just as there were some indications the gap may be narrowing in early 2024, the March employment reports put an exclamation point on the wedge,” writes Douglas Porter, chief economist at BMO.  

Canadian Inflation Weakened Faster Than The US… It’s Not Good News

The divergence for employment is also a big factor when it comes to inflation. Canadian CPI’s annual growth came in at just 2.8% last month, in contrast to the 3.4% seen in the US. More importantly, the headline rate in Canada is on the way down while it’s heading the opposite direction in the US. 

Moderating inflation is generally good news, but emphasizes Canada’s weakness here. Greater unemployment is likely curbing consumption and thus allowing higher inventories. Porter also notes the unemployment rate means employment is no longer “tight,” and will ease wage pressures. Great for monetary measures, not so much for the average household. 

In fact, Porter points to the influence of unemployment on economic recession in both countries. “Over the past 40 years, in both Canada and the U.S., any time it [unemployment] has risen by 25% or more, the economy has been in recession,” he notes. Highlighting the US has climbed less than 10% from recent lows, whereas Canada has climbed 23%—nearly hitting that number. 

Though he adds the caveat of population growth. The breakneck growth observed in Canada allows it to print mild growth based on aggregate measures. However, that only conceals the weakness readily observed in the per capita growth rates. 

Canada To Cut Rates Before US, But The US May Not Cut This Year 

Canada’s economy traditionally moves very closely with the US, but it may no longer be able to do so. “Markets have been steadily reeling back expectations of Fed rate cuts almost since the year began, and this week’s events pulled the string a bit further,” writes Porter. 

He even emphasized the split within the US Federal Reserve on rate cuts, where branch President Kashkari warned it’s possible none occur this year. 

BMO’s current forecast still sees mid-year rate cuts for both Canada and the US, at this point. However, they emphasize there are some factors, including housing, that may cause Canada to delay slightly. 

In any event, the bank sees Canada leading the US when it comes to rate cuts due to the widening divergences when it comes to performance.

9 Comments

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  • Carl 1 month ago

    If Canada lowers rates to pump up house prices and the USA does not lower rates…how does that affect inflation in Canada? Will it not make everything more expensive?

  • Housing C_ash 1 month ago

    House prices continue to increase -> number of unemployed continues to increase -> high immigration continues -> immigrants bringing money with them and spend all their savings on high rental costs -> immigrants run out of money due to lack of jobs and depleted savings -> immigrants eventually leave -> renting relies on airbnb setups -> Airbnb units in excess -> airbnb units start charging less -> monthly rental properties lose renters and house owners have to start charhing less -> some rental owners start selling a home or two to offset rental discounts -> increase in houses on the market -> snowball start rolling in Canada -> ?

  • Balter 1 month ago

    Makes sense; the Canadian real estate market in particular is not protected by thirty year mortgage terms. We probably pay less interest over time but that leaves homeowners exposed to rate rollover.

    • Amir 1 month ago

      I think we pay much more interest over time because our prices 3 times higher in GTA vs NY area suburbans. I m not even talking about states that have lower real estate prices.

  • Matt 1 month ago

    Canada voted for a weak economy. With persuasion from China of course. Keep them carbon taxes rolling!

  • americanhomebuy 1 month ago

    Don’t believe everything you read. Canada needs higher rates to create incentives for more investment into the country. Look at rates around the world. Canada has a long way up to go.
    House builders don’t set rates – international money markets do.

  • Noah 1 month ago

    If rate cuts start we should be concerned about what the 2 year time horizon following that will look like. When the BoC prematurely cut rates in the 80s it was followed by higher inflation and rates than if they had they just left the rates where they were the first time. If the same thing were to happen again it would be wise to seriously consider the implications of rates that are even higher, particularly on the already strained mortgage market. In my opinion cutting rates now would be a serious mistake and just serves to make things worse.

  • Frank 1 month ago

    The unemployment rate in Canada is about to get alot worse. The June report will be ugly.

  • Straw walker 1 month ago

    Rates need to remain stable
    That’s what central banks are committed to. Economic stability

    Bank rates are not a yo yo
    Bank rates are not influenced by every media whim

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