By Ketki Saxena
Investing.com -- In another sign that higher interest rates are beginning to cool the overheated domestic economy, Canada’s unemployment rate saw an unexpected jump, up to 5.4% in August compared to 4.9% in August. Analysts had expected an increase of only 0.1% to 5%.
The Canadian economy also lost a net 39,700 jobs in August, missing analyst forecasts for a gain of 15,000 positions. The majority of job losses were in full time positions.
The overall participation rate meanwhile ticked up to 64.8% as 66,200 people joined the labour force.
August marks the third consecutive month that the Canadian economy has shed jobs. During this three month period, the Canadian economy lost 113,500 jobs in the last three months. Despite this decline, full-time employment remains 3.9% higher than a year ago, Statscan noted.
Wage gains continued to accelerate in August up 5.6% year over year compared with 5.4% in July. However, the pace of wage growth remains well below inflation - 7.6% at last count. Wage pressure is also being increasingly felt by Canadian workers, with a growing number of employees planning to leave their current jobs in the next 12 months, citing unsatisfactory pay and benefits as the top reason for their planned moves.
Wage pressure and increasing labour costs are also a key driver of inflation, implying that the Bank of Canada will likely stay committed to its aggressive path of policy tightening even as the labour market cools, and as consumers further feel the pinch of increased borrowing costs that, along with inflation, keep cutting further into discretionary income.
Andrew Kelvin, chief Canada strategist at TD (TSX:TD) Securities, notes that the Bank of Canada is unlikely to be “Overly alarmed by the weakening in the jobs reading” and the “indication that the economy is, in fact, slowing” as slack begins to return to the historically tight labour market.
So far, the Bank of Canada has remained resolutely committed to hiking rates in an effort to slow 4-decade high inflation, despite growing indicators of a cooldown in the economy, including last week’s 0.1% GDP growth reading for the month of June.
Canada's central bank lifted its policy rate by a relatively aggressive 75 bps to 3.25% on Wednesday, and strongly indicated that more tightening is on the way this year. Today’s less than stellar jobs reading is unlikely to deter a Central Bank that believes a potential downturn is a leser evil than entrenched inflation. Analysts widely expect two consecutive 25 bps moves from the Bank of Canada at its meetings in October and December, taking the benchmark overnight rate to 3.75% by year end.