Unemployment in Canada hits record low, supporting higher interest rates

Canada’s job market is now beyond hot and has started to overheat. Statistics Canada (Stat Can) reported that March hit a new record low for the unemployment rate. Such tight labor markets are considered 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 unemployment rate in Canada has never been so low

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

The adjusted unemployment rate is the share of people who want a job but have not looked for one. The agency said that 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.

Unemployment in Canada will create more inflationary pressure

The record unemployment rate is quickly becoming another challenge for inflation. “Given the strong competition, companies are looking to increase wages at an unprecedented rate to attract/retain talent…” said Matthieu Arseneau, Deputy Chief Economist at the National Bank of Canada.

Referring to the Bank of Canada’s Business Outlook Survey, he adds: “This is a situation that the central bank must deal with, as such an environment could compromise the ability to achieve its objective of long-term inflation.

Arseneau argues that this environment was suited for a crisis, but did not change much as the economy improved. With unemployment so tight, it causes unproductive wages to grow. This will make fighting inflation a bigger challenge. He sees the central bank raising interest rates by 50 basis points next week in an attempt to rein in some of that excess.

A tight labor market will support more aggressive rate hikes

The National Bank is not the only one to note that the labor market is too tight. Royce Mendes, head of macro strategy at Desjardins, expressed a similar sentiment and expects the Bank of Canada to react strongly to the data.

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

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

The program to reduce bond holdings is called quantitative tightening, and it is the opposite of the program that has helped drive up house prices.

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