Canadian Unemployment Hit A Record Low, Supporting Higher Interest Rates

Canada’s employment market is now beyond hot, and has begun overheating. Statistics Canada (Stat Can) reported March reached a new record low for the  unemployment rate. Labor markets running this tight are seen as overheated and contribute to even higher inflation. Experts see this reinforcing the need for higher interest rates — even endorsing a more aggressive rate hike schedule. 

The Canadian Unemployment Rate Has Never Been Lower

Canada’s unemployment rate reached a record low last month. The rate fell to 5.3% in March, down 0.2 points from the previous month. Unemployment recovered to pre-2020 levels back in October. The agency says it was the lowest record on record, going back to the 1970s. 

The adjusted unemployment rate is the share of people who want a job but didn’t look. The agency said this rate fell to 7.2% in March, falling below pre-pandemic levels for the first time. Not quite a record, but low enough that this monetary environment may be too easy. 

Canadian Unemployment Will Create More Inflation Pressure

Record low unemployment is quickly becoming another inflation challenge. “Considering strong competition, companies are planning to raise wages at an unprecedented rate to attract/retain talent…” said Matthieu Arseneau, Deputy Chief Economist at National Bank of Canada.

Referencing the Bank of Canada’s Business Outlook Survey he adds, “This is a situation that the central bank needs to address, as such an environment could jeopardize the ability to achieve its long-term inflation target.”

Arseneau argues this environment was suited to a crisis but hasn’t changed much as the economy improved. With unemployment so tight it’s driving non-productive wage growth. This will make tackling inflation a more significant challenge. He sees the central bank hiking interest rates by 50 basis points next week to try and tame some of this excess. 

A Tight Labor Market Will Support More Aggressive Rate Hikes

National Bank isn’t alone when it comes to seeing the labor market is too tight. Royce Mendes, Desjardins’ head of macro strategy, expressed a similar sentiment and expects the Bank of Canada to respond strongly to the data.

“The labor market now seems to be on the verge of overheating, which would create unwanted inflationary pressures,” said Mendes. 

Adding, “As a result, look for aggressive action from the Bank of Canada next week to bring the economy back into balance. Central bankers will likely not only raise the target for the policy rate by 50bps, but they will also initiate a program to reduce their bond holdings.”

The program to reduce bond holdings is called quantitative tightening, and it’s the opposite of the program that helped boost home prices.

4 Comments

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  • Doomcouver 8 months ago

    30-year macro trend of downward rate trajectory is probably reversing now. Adjust your expectations accordingly.

  • Brunolio 8 months ago

    Anyone else been on a work slowdown due to housing availability and costs? To hard to operate my business at full speed with the cavalcade of insane social contract breaking over the past 2 years. This also makes it difficult if not impossible to plan ahead, so how this pans out for everyone will certainly differ, but it won’t be all around pretty. GLHF.

  • D 8 months ago

    Fake unemployment numbers (obviously larger) and lots of fake job postings so HR folks can have some work to do. Crime rising. Prices of everything rising. This isn’t indicative of red hot job market where everybody is working.

    • Jason Chau 7 months ago

      Unemployment isn’t determined by job postings, but a combination of payroll data, unemployment benefits, and surveys.

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