Robust Economy Means More Bank of Canada Rate Hikes Are Coming

(Bloomberg) -- Canada’s economy continues to show enough strength to warrant higher interest rates.

The country had its strongest monthly jobs gain this year in September with the unemployment rate hovering near four-decade lows, while producing its first international trade surplus in almost two years amid a recent recovery in exports. The data released Friday comes on the heels of a string of reports -- including gross domestic product numbers for July -- that are consistent with a relatively sturdy economy.

All this should bolster confidence among policy makers at the Bank of Canada that the economy can handle the higher borrowing costs needed to bring rates back to more normal levels. The central bank has already increased rates four times since last year, with investors expecting as many as four more hikes over the next 12 months, including one later this month.

The jobs data “simply reinforces the likelihood of an October Bank of Canada rate hike, and keeps a firm foundation on further moves in 2019,” Doug Porter, chief economist at Bank of Montreal, said in a note to investors.

Statistics Canada reported an employment gain of 63,300 in September, capping what was the strongest quarter of new jobs this year. The jobless rate fell to 5.9 percent last month, from 6 percent in August.

The agency also reported an unexpected C$526 million ($407 million) trade surplus in August, the country’s first since December 2016, suggesting the trade sector will contribute significantly to growth again in the third quarter.

Good News

The data comes on the heels of some good news on the trade and energy fronts. Canada reached an agreement with President Donald Trump late Sunday to join a new trade deal with the U.S. and Mexico, ending more than a year of uncertainty for the nation’s businesses, while a Royal Dutch Shell Plc-led group announced it’s moving forward on a C$40 natural gas terminal in British Columbia.

Economists are projecting annualized third-quarter growth of 2.1 percent, after output expanded at a 2.9 percent pace in the second quarter. Growth in the fourth quarter is seen at 2.4 percent. Most analysts believe growth rates above 2 percent are above the economy’s non-inflationary speed limit, meaning the country is potentially pushing even harder against capacity constraints.

At the same time, there are few signs of overheating -- giving the Bank of Canada scope to take its time if it chooses. The stronger employment numbers in recent months are only offsetting a much weaker performance for the jobs market in the first half. Overall, the economy has added a total 48,700 jobs through September, down from 253,600 jobs at this time last year -- a pace that was largely seen as unsustainable at the time.

Plus, there are signs of slowing wage gains while hours worked actually fell last month, suggesting there is still some slack in the labor market. The recently improving trade picture meanwhile reflects weaker imports, potentially a sign of weaker economic demand.

“We expect a hike at the Bank of Canada’s meeting later this month, with a decent (and more balanced) growth backdrop arguing for less monetary policy accommodation,” Josh Nye, a senior economist at Royal Bank of Canada, said in a note to investors. “But we think that will be their last move this year. Until we see evidence of wages and inflation responding more significantly to capacity constraints, the Bank of Canada has little reason to speed up the pace of tightening.”

--With assistance from Erik Hertzberg.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier, Stephen Wicary

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