Bank of Canada unlikely to move interest rates any time soon

Canada's employment numbers add more paint to the generally positive picture of the Canadian economy in the third quarter. The quarterly gains in hours worked are supportive of growth, which is currently tracking at about 2.5% annualized for Q3.

The drivers of to-date employment growth in Canada are mixed. Goods-producing sectors have seen net job losses, offset by gains in services, particularly health care and professional services. These increases cannot be sustained forever, and while a recovery is expected in hiring in the goods sectors, it is likely to be modest. 

"As a result, employment growth the remainder of the year is expected to be modest (about 5K to 15K per month overall). Slow gains in employment will translate to a slow decline in the unemployment rate, and a deceleration of wage growth, which has been unusually strong recently when compared with the hiring numbers", says TD Economics.

From the Bank of Canada's perspective, there was little in the employment report that is likely to change their thinking. The Bank of Canada is expected to revise its forecast for third quarter upwards, to reflect the improved near-term outlook for growth. 

"Even with a better near-term growth outlook however, the Bank is unlikely to move interest rates any time soon. The Canadian economy continues to recovery neatly, but a significant output gap remains, and growth is expected to moderate to about 2% annualized over the medium term, closing the output gap quite slowly", anticipates TD Economics. 

With the Federal Reserve expected to begin raising its policy interest rate early next year, financial conditions in Canada will tighten, further reducing any impetus for a rate increase. All of these factors suggest that the Bank of Canada will sit on the sideline for quite some time.