18 Sep

Bank of Canada Rate Update September 17th 2025

General

Posted by: Jen Lowe

Bank of Canada Lowers Policy Rate to 2.5%
Today, the Bank of Canada lowered the overnight policy rate by 25 bps to 2.5% as was widely expected. Following yesterday’s better-than-expected inflation report, the Bank believes that underlying inflation was 2.5% year-over-year.

Through the recent period of tariff turmoil, the Governing Council has closely monitored the risks and uncertainties facing the Canadian economy. Three developments triggered the Bank’s rate cut. Canada’s labour market softened further. Upward pressure on underlying inflation has diminished, and there is less upside to risk to future inflation with the removal of most retaliatory tariffs by Canada.

Considerable uncertainty remains. However, with a weaker economy and less upside risk to inflation, the Governing Council deemed that a reduction in the policy rate was appropriate to better balance the risks going forward.

“The Bank will continue to assess the risks, look over a shorter horizon than usual, and be ready to respond to new information.”

Today’s press release suggests that the global economy has slowed in response to trade disputes. In the US, business investment has been substantial, primarily driven by expenditures on Artificial Intelligence. However, consumers are cautious, and employment gains have slowed. It is nearly a certainty that the Federal Reserve will lower its overnight policy rate this afternoon.

Growth in the euro area has moderated as US tariffs affect trade. China’s economy held up in the first half of the year, but growth appears to be softening as investment weakens. Global oil prices are close to their levels assumed in the July Monetary Policy Report (MPR). Financial conditions have continued to ease, with higher equity prices and lower bond yields. Canada’s exchange rate has been stable relative to the US dollar.”

Canada’s economy contracted in the second quarter, posting a growth rate of -1.6%. Exports fell by 27% in Q2 following a surge in exports in advance of tariffs in Q1. Business investment also fell in Q2. “In the months ahead, slow population growth and the weakness in the labour market will likely weigh on household spending.”

Employment has declined in the past two months. “Job losses have largely been concentrated in trade-sensitive sectors, while employment growth in the rest of the economy has slowed, reflecting weak hiring intentions. The unemployment rate has moved up since March, hitting 7.1% in August, and wage growth has continued to ease.”

Bottom Line

The Bank of Canada was pretty tight-lipped about future rate cuts, but given the current trajectory, we expect another rate cut when they meet again this fall. The next BoC decision date is October 29, and the central bank wraps up the year on December 10. We expect at least one more rate cut this year, ending the year with a policy rate of 2.0%-2.25%. This should help boost interest-sensitive spending, most particularly housing, where there is considerable pent-up demand.

The Bank will move cautiously, but with the Fed cutting rates again later this year, this gives the BoC cover. While some have questioned the Bank’s easing in the face of 3% core inflation, other inflation measures suggest that underlying inflation is roughly 2.5%. The economic and labour market slowdown bodes well for another rate cut.

Traders in overnight swaps continue to price in another cut from the central bank this cycle, and put the odds at about a coin flip that they’ll ease again in October.

The central bank’s communications suggest that while it has resumed monetary easing to support the ailing economy, it is leery of cutting interest rates too quickly, given the potential inflation risks posed by the surge in global protectionism and tariffs.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
16 Sep

Canadian Inflation is lower than expected = Green light for the Bank of Canada tomorrow to lower the overnight lending rate!

General

Posted by: Jen Lowe

Canadian Inflation More Muted Than Expected, Giving the Green Light for BoC Easing Tomorrow
The Consumer Price Index (CPI) rose 1.9% on a year-over-year basis in August, up from a 1.7% increase in July.

Gasoline prices fell to a lesser extent year over year in August (-12.7%) compared to July (-16.1%), resulting in faster growth in headline inflation. Excluding gasoline, the CPI rose 2.4% in August, following increases of 2.5% in each of the previous three months.

Moderating the acceleration in the all-items CPI were lower prices for travel tours and fresh fruit compared with July.

The CPI decreased by 0.1% month-over-month in August. On a seasonally adjusted monthly basis, the CPI was up 0.2%.

Yearly, gasoline prices fell 12.7% in August, compared with a 16.1% decline in July. The smaller year-over-year decrease was partially due to a base-year effect. In August 2024, gasoline prices declined 2.6% month over month, as concerns about slower economic growth began to emerge. In August 2025, prices rose 1.4% month-over-month, primarily due to higher refining margins that offset lower crude oil costs.

Prices for cellular services fell to a lesser extent year over year in August (-1.2%) compared with July (-6.6%). Monthly, prices were up 1.5% in August, as multiple providers increased prices with fewer back-to-school sales available for cellular phone plans.
Partially offsetting the price increase were lower prices month over month for multipurpose digital devices (-1.5%), which include smartphones and tablets.

Grocery price inflation remains a thorn, up a tick to 3.5% y/y (and partly explains the gap between the BoC’s 3% core measures and the more benign 2.4%). In August, prices for meat rose 7.2% year-over-year, following a 4.7% increase in July. Prices for fresh fruit fell 1.1% in August, after increasing 3.9% in July. Price declines for grapes, other fresh fruit, and berries (including cherries) contributed the most to the yearly price decrease for fresh fruit in August.

Prices for clothing and footwear rose 1.7% year-over-year last month, compared with a 0.8% increase in July. The increase in August was primarily due to a base-year effect, as prices declined by 0.6% in August 2024.

Year over year, prices for travel services decreased 3.8% in August, following a 1.2% decrease in July.

Shelter cost trends are now more favourable, as sagging home prices and a rare lull in home insurance costs cut owned accommodation by 0.1% month-over-month for a second consecutive month; this had not occurred since 2020. Rent remains the single most significant driver of overall inflation, although it cooled to 4.5% y/y (from 5.1%) and seems headed lower.

Core inflation was largely as expected, with most major measures rising a moderate 0.2% m/m in adjusted terms, but keeping the Bank of Canada’s preferred gauges locked around the 3% y/y pace. Median held steady at 3.1% y/y, while trim eased a tick to 3.0%.

However, the shorter-term metrics on most of the core indices were more favourable, as the three-month trend on trim and median averaged 2.5%. Recall that the BoC has recently suggested underlying inflation trends are around 2-1/2%, and even the ex-food and energy component chimed in with a 2.4% year-over-year clip, with the three-month trend easing to just 1.6%. (For reference, U.S. ex food & energy CPI was 3.1% y/y last month.)

On the trade war watch, goods excluding energy and groceries eased slightly to a 1.7% year-over-year pace from 2.0% in July. That’s still a bit hotter than the pre-pandemic norm, but less than half the pace seen during the pandemic inflation scare of 2022/23. Auto prices had been leading the way higher in recent months, but they cooled slightly to 4.0% y/y, from 4.5% the prior month.

Bottom Line

This report showed inflation measures rising no more than a tame 0.2% month-over-month (m/m) in seasonally adjusted terms. That pace won’t cause the Bank of Canada much stress, thus keeping them on track for a rate cut at tomorrow’s decision.

The milder underlying short-term trends in core, alongside the recent weakening in employment, bode well for further rate relief this fall. However, we suspect the Bank will continue to take it one meeting at a time, restrained by the 3% year-over-year trends in some core measures, as well as the likelihood that headline inflation will rise, at least temporarily, in next month’s report due to base effects.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
15 Sep

Canadian Housing Update

General

Posted by: Jen Lowe

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Canadian Home Sales Post Best August In Four Years
Today’s release of the August housing data by the Canadian Real Estate Association (CREA) showed good news on the housing front. The number of home sales recorded through Canadian MLS® Systems increased by 1.1% on a month-over-month basis in August 2025. It was the best August for sales since 2021, marking the fifth consecutive monthly increase in activity and a cumulative 12.5% gain since March.

Unlike in recent months, when gains were led overwhelmingly by the Greater Toronto Area (GTA), sales in the GTA were down slightly in August; however, this was more than offset by higher sales in Montreal, Greater Vancouver, and Ottawa.

“Activity has continued to gradually pick up steam over the last five months, but the experience from a year ago suggests that trend could accelerate this fall,” said Shaun Cathcart, CREA’s Senior Economist. “Part of what drives sales at different points in the year is the availability of a lot of fresh property listings for buyers to buy. For the fall market, that always happens right at the beginning of September, and this year was no exception. If last year is any kind of guide, then there is the potential that sales could really pick up in the next month or so depending on how many buyers are drawn off the sidelines, particularly if we see a September rate cut by the Bank of Canada.”

New Listings

“August continued the trend of rising sales in many markets across the country, and while momentum slowed compared to July, much of that is simply a reflection of the time of year,” said Valérie Paquin, CREA Chair. “Now that we are on the other side of Labour Day, new listings are flooding onto the market.”

There were 4.4 months of inventory on a national basis at the end of August 2025, the lowest level since January. The long-term average for this measure of market balance is five months of inventory. Based on one standard deviation above and below that long-term average, a seller’s market would be below 3.6 months, and a buyer’s market would be above 6.4 months.

Home Prices

The National Composite MLS® Home Price Index (HPI) was again almost unchanged (-0.1%) between July and August 2025. Following declines in the first quarter of the year, the national benchmark price has been mostly stable since April, when the market bottomed.

The non-seasonally adjusted National Composite MLS® HPI was down 3.4% compared to August 2024. Based on the extent to which prices fell off beginning in the fall of 2024, look for year-over-year declines to continue to shrink in the months ahead.

Bottom Line

Homebuyers are responding to improving fundamentals in the Canadian housing market. Supply has risen as new listings surged until May of this year. Additionally, the benchmark price was $664,078, which is more than 4% lower than it was a year earlier. That decrease was smaller than in June, and the board expects year-over-year declines to continue shrinking, it stated in a press release.

The view is nearly unanimous that both the Federal Reserve and the Bank of Canada will cut the overnight policy rate by 25 basis points when they meet again this Wednesday, September 17. The Canadian CPI for August will be released tomorrow, and if inflation is relatively stable or down, the Bank could continue to lower rates in October and December as well. This could be what it takes to move potential buyers off the sidelines.

While trade uncertainty is likely to persist, we can expect to see accelerated housing activity during the fall selling season, which is contrary to standard seasonal patterns.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
5 Sep

Weak August Jobs Report In Canada Bodes Well for a BOC Rate Cut!

General

Posted by: Jen Lowe

Weak August Jobs Report in Canada Bodes Well for a BoC Rate Cut
Today’s Labour Force Survey for August was weaker than expected, indicating an excess supply in the labour market and the economy. Employment fell by 66,000 (-0.3%) in August, extending the decline recorded in July (-41,000; -0.2%). The employment decrease in August was mainly due to a decline in part-time work (-60,000; -1.5%). Full-time employment was little changed in August, following a decrease in July (-51,000; -0.3%).

The employment rate—the proportion of the working-age population who are employed—fell 0.2 percentage points to 60.5% in August, the second consecutive monthly decline. The employment rate has been on a downward trend since the beginning of the year, falling 0.6 percentage points from January to August.

The number of self-employed workers fell by 43,000 (-1.6%) in August. Self-employment has trended down in recent months, offsetting gains recorded in the second half of 2024 and in early 2025.

The private sector lost 7,500 jobs last month, while the public sector shed 15,000. Regionally, the provinces of Ontario, Alberta and British Columbia led losses.

Those who were unemployed in July continued to face difficulties finding work in August. Just 15.2% of those who were unemployed in July had found work in August, lower than the corresponding proportion for the same months from 2017 to 2019 (23.3%) (not seasonally adjusted).

The participation rate—the proportion of the population aged 15 and older who were employed or looking for work—fell by 0.1 percentage points to 65.1% in August.

From May to August, the Labour Force Survey (LFS) collects labour market information from students who attended school full-time in March and who intend to return to school full-time in the fall.
The unemployment rate for returning students stood at 16.9% in August, similar to the rate observed 12 months earlier (16.3%) (not seasonally adjusted).

For the summer of 2025 overall (the average from May to August), the unemployment rate for returning students aged 15 to 24 was 17.9%. This was the highest since the summer of 2009 (18.0%), excluding the pandemic year of 2020. The unemployment rate for returning students has increased each summer since 2022 (when it was 10.4%).

The unemployment rate among returning students in the summer of 2025 was higher for men (19.2%) than for women (16.8%).

Employment decreased in the professional, scientific, and technical services sector in August (-26,000; -1.3%), following five months of little change. Despite the monthly decline, employment in the industry was up 36,000 (+1.8%) compared with 12 months earlier.

Employment in transportation and warehousing fell by 23,000 (-2.1%) in August, offsetting a similar-sized increase in July. On a year-over-year basis, employment in the industry was little changed in August.

Employment change by industry in August 2025

Fewer people were working in manufacturing in August, down 19,000 (-1.0%). Compared with the recent peak of January 2025, employment in manufacturing has declined by 58,000 (-3.1%).

On the other hand, employment rose in construction (+17,000; +1.1%) in August, offsetting most of the decline in July (-22,000; -1.3%). Employment in construction has recorded little net variation since the beginning of the year, and the increase in August was the first since January.

Employment in Ontario decreased by 26,000 (-0.3%) in August. Compared to the recent peak in February 2025, employment in the province decreased by 66,000 (-0.8%) in August. The unemployment rate in Ontario declined by 0.2 percentage points to 7.7% in August, as the number of people searching for work decreased.

Since the beginning of the year, regions of Southern Ontario have faced an uncertain economic climate, brought on by the threat or imposition of tariffs, including on motor vehicle and parts exports. Across Canada’s 20 largest census metropolitan areas, the highest unemployment rates in August were in Windsor (11.1% compared with 9.1% in January), Oshawa (9.0% compared with 8.2% in January) and Toronto (8.9% compared with 8.8% in January) (three-month moving averages).

In British Columbia, employment decreased by 16,000 (-0.5%) in August, marking the second consecutive monthly decline. Losses in the month were mainly among core-aged men (-13,000; -1.2%). The unemployment rate in British Columbia rose 0.3 percentage points to 6.2%.

In Alberta, employment fell by 14,000 (-0.6%) in August, also the second consecutive monthly decrease. The most significant declines in the month were in manufacturing and in wholesale and retail trade. The unemployment rate in Alberta rose 0.6 percentage points to 8.4% in August, the highest rate since August 2017 (excluding 2020 and 2021).

Unemployment rate by province and territory, August 2025

Unemployment rates highest in southern Ontario census metropolitan areas
Employment also declined in New Brunswick (-6,500; -1.6%), Manitoba (-5,200; -0.7%), and Newfoundland and Labrador (-3,200; -1.3%) in August. Meanwhile, Prince Edward Island experienced an employment gain of 1,100 (+1.2%).

Employment held steady for a second consecutive month in Quebec in August. The number of people looking for work increased by 24,000 (+9.0%), pushing the unemployment rate up 0.5 percentage points to 6.0%.

Total hours worked were little changed in August (+0.1%) and were up 0.9% compared with 12 months earlier.

Average hourly wages among employees increased 3.2% (+$1.12 to $36.31) on a year-over-year basis in August, following growth of 3.3% in July (not seasonally adjusted).

Bottom Line

The two-year government of Canada bond yield fell about four bps on the news, while the loonie weakened. Traders in overnight swaps fully priced in a quarter-point rate cut by the Bank of Canada by year-end, and boosted the odds of a September cut to about 85%.

The Bank of Canada has made it clear that it will focus on inflation more than on increasing slack in the economy, and a September cut may still hinge on the consumer price index release, which is due a day before the rate decision.

The August US nonfarm payrolls report was also released this morning, showing that job growth stalled while the unemployment rate rose slightly to 4.3%. Several sectors, including information, financial activities, manufacturing, federal government and business services, posted outright declines in August. Job growth was concentrated in the healthcare and leisure and hospitality sectors.

Markets expect the Fed to cut rates by 25 basis points on September 17. Fed Chair Jay Powell has been under massive pressure from the White House to do so. Barring a meaningful rise in August core inflation measures, the Fed will resume cutting rates.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
19 Aug

Today’s CPI Report Shows Headline Inflation Cooling, But Core Inflation Remains Troubling

General

Posted by: Jen Lowe

Today’s CPI Report Shows Headline Inflation Cooling, But Core Inflation Remains Troubling
Canadian consumer prices decelerated to 1.7% y/y in July, a bit better than expected and down two ticks from June’s reading.
Gasoline prices led the slowdown in the all-items CPI, falling 16.1% year over year in July, following a 13.4% decline in June. Excluding gasoline, the CPI rose 2.5% in July, matching the increases in May and June.

Gasoline prices fell 0.7% m/m in July. Lower crude oil prices, following the ceasefire between Iran and Israel, contributed to the decline. In addition, increased supply from the Organization of the Petroleum Exporting Countries and its partners (OPEC+) put downward pressure on the index.

Moderating the deceleration in July were higher prices for groceries and a smaller year-over-year decline in natural gas prices compared with June.

The CPI rose 0.3% month over month in July. On a seasonally adjusted monthly basis, the CPI was up 0.1%.

In July, prices for shelter rose 3.0% year over year, following a 2.9% increase in June, with upward pressure mostly coming from the natural gas and rent indexes. This was the first acceleration in shelter prices since February 2024.

Prices for natural gas fell to a lesser extent in July (-7.3%) compared with June (-14.1%). The smaller decline was mainly due to higher prices in Ontario, which increased 1.8% in July after a 14.0% decline in June.

Rent prices rose at a faster pace year over year, up 5.1% in July following a 4.7% increase in June. Rent price growth accelerated the most in Prince Edward Island (+5.6%), Newfoundland and Labrador (+7.8%) and British Columbia (+4.8%).

Moderating the acceleration in shelter was continued slower price growth in mortgage interest cost, which rose 4.8% year over year in July, after a 5.6% gain in June. The mortgage interest cost index has decelerated on a year-over-year basis since September 2023.

The Bank of Canada’s two preferred core inflation measures accelerated slightly, averaging 3.05%, up from 3% in May, and above economists’ median projection. Traders see the continued strength in core inflation as indicative of relatively robust household spending.

There’s also another critical sign of firmer price pressures: The share of components in the consumer price index basket that are rising by 3% or more — another key metric the central bank’s policymakers are watching closely — expanded to 40%, from 39.1% in June.

CPI excluding taxes eased to 2.3%, while CPI excluding shelter slowed to 1.2%. CPI excluding food and energy dropped to 2.5%, and CPI excluding eight volatile components and indirect taxes fell to 2.6%.

The breadth of inflation is also rising. The share of components with the consumer price index basket that are increasing 3% and higher — another key metric that the bank’s policymakers are following closely  — fell to 37.3%, from 39.1% in June.

Bottom Line

With today’s CPI painting a mixed picture, the following inflation report becomes more critical for the Governing Council. The August CPI will be released the day before the September 17 meeting of the central bank. There is also another employment report released on September 5.

Traders see roughly 84% odds of a Federal Reserve rate cut when they meet again on Sept 17–the same day as Canada. Currently, the odds of a rate cut by the BoC stand at 34%. Unless the August inflation report shows an improvement in core inflation, the Bank will remain on the sidelines.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
15 Aug

Good news for the Housing Market in Canada!

General

Posted by: Jen Lowe

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Canadian Homebuyers Return in July, Posting the Fourth Consecutive Sales Gain
Today’s release of the July housing data by the Canadian Real Estate Association (CREA) showed good news on the housing front. Following a disappointing spring selling season, National home sales were up 3.8% in July from the month before, with Toronto seeing transactions rebound 35.5% since March. However, the total number of Toronto sales remains low by historical standards.

On a year-over-year basis, total transactions have risen 11.2% since March.

There is growing confidence that the Canadian economy will resiliently weather the tariff trauma. The Canadian dollar is up, and longer-term interest rates have edged downward in the past ten days. Traders are now anticipating a rate cut by the Federal Reserve in September.

Tuesday’s release of the Canadian CPI will provide another data point for the Bank of Canada. Economic growth has held up, in large part because much of the pain from tariffs has been confined to industries singled out for levies, including autos, steel and aluminum.

Shaun Cathcart, the real estate board’s senior economist, said, “With sales posting a fourth consecutive increase in July, and almost 4% at that, the long-anticipated post-inflation crisis pickup in housing seems to have finally arrived. The shock and maybe the dread that we felt back in February, March and April seem to have faded,” as people become less concerned about their future employment.

New Listings

New supply was little changed (+0.1%) month-over-month in July. Combined with the notable increase in sales, the national sales-to-new listings ratio rose to 52%, up from 50.1% in June and 47.4% in May. The long-term average for the national sales-to-new listings ratio is 54.9%, with readings roughly between 45% and 65% generally consistent with balanced housing market conditions.

There were 202,500 properties listed for sale on all Canadian MLS® Systems at the end of July 2025, up 10.1% from a year earlier and in line with the long-term average for that time of the year.

“Activity continues to pick up through the transition from the spring to the summer market, which is the opposite of a normal year, but this has not been a normal year,” said Valérie Paquin, CREA Chair. “Typically, we see a burst of new listings right at the beginning of September to kick off the fall market, but it seems like buyers are increasingly returning to the market.

There were 4.4 months of inventory on a national basis at the end of July 2025, dropping further below the long-term average of five months of inventory as sales continue to pick up. Based on one standard deviation above and below that long-term average, a seller’s market would be below 3.6 months, and a buyer’s market would be above 6.4 months.

Home Prices

The National Composite MLS® Home Price Index (HPI) was unchanged between June and July 2025. Following declines in the first quarter of the year, the national benchmark price has remained mostly stable since May.

The non-seasonally adjusted National Composite MLS® HPI was down 3.4% compared to July 2024. This was a smaller decrease than the one recorded in June.

Based on the extent to which prices fell off in the second half of 2024, look for year-over-year declines to continue to shrink in the months ahead.

Bottom Line

Homebuyers are responding to improving fundamentals in the Canadian housing market. Supply has risen as new listings surged until May of this year. Additionally, the benchmark price was $688,700, 3.4% lower than a year earlier. That decrease was smaller than in June, and the board expects year-over-year declines to continue shrinking, it said in a statement.

While many expect the Fed to ease in September, I’m not sure it will happen. The producer price index came in hotter than expected this week. Fed action will depend mainly on the personal consumption expenditures index (PCE), the Fed’s favourite measure of inflation, which will be out on August 29.

US stagflation worries have emerged with the release of the July employment report, which showed considerable weakness, enough to get the head of the Bureau of Labour Statistics fired. The likelihood of a BoC cut will increase if the Fed begins a series of easing moves as the administration is demanding.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
16 Jul

Today’s Report Shows Inflation Remains a Concern, Forestalling BoC Action

General

Posted by: Jen Lowe

Today’s Report Shows Inflation Remains a Concern, Forestalling BoC Action
Canadian consumer prices accelerated for the first time in four months in June, and underlying price pressures firmed, likely keeping the central bank from cutting interest rates later this month.

The annual inflation rate in Canada rose to 1.9% in June from 1.7% in May, aligning with market expectations. Despite the pickup, the rate remained below the Bank of Canada’s mid-point target of 2% for the third consecutive month.

Headline inflation grew at a faster pace, as gasoline prices fell to a lesser extent in June (-13.4%) than in May (-15.5%). Additionally, faster price growth for some durable goods, such as passenger vehicles and furniture, put upward pressure on the CPI in June.

Prices for food purchased from stores rose 2.8% year-over-year in June, following a 3.3% increase in May.

Year over year, the CPI excluding energy (+2.7%) remained higher than the CPI in June, partly due to the removal of consumer carbon pricing in April.

Monthly, the CPI rose 0.1% in June. On a seasonally adjusted monthly basis, the CPI was up 0.2%.

The Bank of Canada’s two preferred core inflation measures accelerated slightly, averaging 3.05%, up from 3% in May, and above economists’ median projection. The three-month moving annualized average of the core rates surged to 3.39%, from 3.01% previously.

There’s also another important sign of firmer price pressures: The share of components in the consumer price index basket that are rising by 3% or more — another key metric the central bank’s policymakers are watching closely — expanded to 39.1%, from 37.3% in May.

Bottom Line

The chart below, created by our friends at Mortgage Logic News, shows that  Canadian economic data have come in stronger than expected on average in recent weeks. This was evident in the June employment report. As a result, the Bank of Canada is likely to remain on the sidelines on July 30 for the third consecutive meeting. The Canadian economy appears to be weathering the tariff storm better than expected, at least for now.

While we expect to see a negative print on Q2 GDP growth, a bounce back to positive growth in Q3 is also possible, precluding the much-expected Canadian recession.

The June inflation data, released today for the US, was weaker than expected for the core price index. Declines in car prices helped mitigate tariff-related increases in other goods within the US consumer basket.

The US inflation data could draw even greater calls from President Trump for the Federal Reserve to lower interest rates. While some officials have expressed a willingness to cut rates when the central bank meets in two weeks, policymakers are generally still divided as to whether tariffs will cause a one-time price shock or something more persistent. They will leave rates unchanged for now.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
6 Jun

Labour Market Weakness Continued in May, Raising the Prospects of a Rate Cut at The Next BoC Meeting

General

Posted by: Jen Lowe

Labour Market Weakness Continued in May, Raising the Prospects of a Rate Cut at The Next BoC Meeting
Today’s Labour Force Survey for March was weaker than expected. Employment decreased by 33,000 (-0.2%) in March, the first decrease since January 2022. The decline in March followed little change in February and three consecutive months of growth in November, December and January, totalling 211,000 (+1.0%).

Today’s Labour Force Survey for May showed a marked adverse impact of tariffs on the Canadian economy. Employment held steady for the second consecutive month at a modest net job change of 8,800–below expectations.

Growth in full-time employment (+58,000; +0.3%) was offset by a decline in part-time work (-49,000; -1.3%). There has been virtually no employment growth since January, following substantial gains from October 2024 to January 2025 (+211,000; +1.0%).

The employment rate—the proportion of the population aged 15 and older—was unchanged at 60.8% in May, matching a recent low observed in October 2024. The employment rate had fallen for two consecutive months in March (-0.2 percentage points) and April 2025 (-0.1 percentage points).

The number of private sector employees rose by 61,000 (+0.4%) in May, the first increase since January. Public sector employment fell by 21,000 (-0.5%) in the month, following an increase in April that was partly attributable to the hiring of temporary workers for the federal election. Self-employment also fell (-30,000; -1.1%) in May, the first significant decrease since May 2023.

The unemployment rate increased 0.1 percentage points to 7.0% in May, the highest rate since September 2016 (excluding 2020 and 2021, during the pandemic). The uptick in May was the third consecutive monthly increase; since February, the unemployment rate has risen by 0.4 percentage points.

There were 1.6 million unemployed people in May, an increase of 13.8% (+191,000) from 12 months earlier. A smaller share of people who were unemployed in April transitioned into employment in May (22.6%), compared with one year earlier (24.0%) and compared with the pre-pandemic average for the same months in 2017, 2018 and 2019 (31.5%) (not seasonally adjusted). This indicates that people face greater difficulties finding work in the current labour market.

The average duration of unemployment has also been rising; unemployed people had spent an average of 21.8 weeks searching for work in May, up from 18.4 weeks in May 2024. Furthermore, nearly half (46.5%) of people unemployed in May 2025 had not worked in the previous 12 months or had never worked, up from 40.7% in May 2024 (not seasonally adjusted).

The layoff rate—representing the proportion of people who were employed in April but became unemployed in May as a result of a layoff—was 0.6%, unchanged from May 2024 (not seasonally adjusted).

Total hours worked were unchanged in May but were up 0.9% compared with 12 months earlier.

Average hourly wages among employees increased 3.4% (+$1.20 to $36.14) year-over-year in May, the same growth rate as in April (not seasonally adjusted).

Employment rose in wholesale and retail trade (+43,000; +1.5%) in May, driven by gains in wholesale trade. The increase partially offsets monthly declines in March and April 2025, totalling 55,000 (-1.8%).

In May, employment increased in information, culture and recreation (+19,000; +2.3%) and finance, insurance, real estate, rental and leasing (+12,000; +0.8%). Employment has increased in finance, insurance, real estate, rental and leasing since October 2024, with a net increase of 79,000 (+5.6%) over the period.

Meanwhile, public administration employment fell (-32,000; -2.5%), offsetting the increase in April that was related to temporary hiring for the federal election. Prior to these offsetting changes, there had been little change in public administration employment since July 2024.

Chart 5 Employment change by industry, May 2025

Employment also declined in May in transportation and warehousing (-16,000; -1.4%); accommodation and food services (-16,000; -1.4%), and business, building and other support services (-15,000; -2.1%).
Bottom Line

US nonfarm payroll data were released this morning, showing a still resilient economy with tariffs beginning to leave their mark. The US added 139,000 jobs in May, exceeding estimates, while the jobless rate remained at 4.2%. A decline in the labour force participation rate kept the lid on May’s US unemployment rate. But the number of unemployed rose for a fourth month, the longest such streak since 2009. Payrolls for the prior two months were revised downward, and wage gains outstripped inflation, helping to boost consumer spending.

A number of other labour market indicators show signs of increasing stress. Household employment dropped by a whopping 696k in May as the labour force shrank by 625k. This kept the unemployment rate relatively stable at 4.244%, but it is hardly a sign of labour market strength and resilience.

Manufacturing employment dropped by 8k, the sector’s worst performance since January. Construction employment growth also slowed to 4k from 7k in April, which is unusual during the Spring home-selling season. There were also stinging net job losses coming from temporary help firms, retail trade, and the Federal government. These sectors likely feel the combined strain from tariffs and DOGE-driven Federal spending cuts.

Nothing in the May employment report will push the Fed off the sidelines earlier than the markets expect. The steady unemployment rate and improvement in the three-month average of monthly job gains will keep the Fed firmly in the wait-and-see camp. With that said, cracks in the façade of labour market resilience are now starting to show, and the longer the tariff uncertainty and government spending cuts continue, the worse the labour market reports are bound to be. Signs of net job loss in manufacturing, temporary help, retail trade, and government are tell-tale signs of that damage.

On the Canadian side, tariffs have already had a substantial effect on the labour market. The jobless rate is at its highest since 2016, excluding the pandemic, as industries impacted by tariffs are laying off workers. The doubling of the tariff on steel and aluminum is especially deleterious. Trade-related sectors are struggling, while domestic-facing industries are partially offsetting the damage.

The May jobs report could have been worse, given that it was burdened by the loss of more than 30,000 election workers. Any increase is welcome, and the gains in private-sector and full-time jobs are encouraging. The glaring issue is that the manufacturing sector is under intense strain amid the deep trade uncertainty, and the overall job market continues to soften, highlighted by the grinding rise in the unemployment rate. In over two years, the jobless rate has risen by two percentage points, as we have gone from 2022 to 2023, when it was difficult to find workers, to today, when it is difficult to find work. While May’s mixed report doesn’t give a clear-cut signal to the BoC, the bigger trend of a rising jobless rate will keep them in easing mode through the year’s second half.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres