Jimmy Jean of Desjardins highlights inflation and labour market concerns ahead of key rate decision
Jimmy Jean, vice-president and chief economist at Desjardins Group, discussed Canada’s economic challenges and the Bank of Canada’s options with the Financial Post’s Larysa Harapyn.
The discussion highlighted key factors influencing the central bank’s next policy move ahead of its meeting on December 11.
Jean described Canada’s economy as a “mixed bag,” with recent data presenting a complex picture. He noted that third-quarter GDP results were weak, albeit expected, but still disappointing.
The job market also raised concerns, with a rising unemployment rate of 6.5 percent and declining labour market participation.
Jean emphasised that these trends indicate a slowdown in wage pressures. “The data certainly favour the Bank of Canada continuing its rate cuts,” he said.
However, he added that the situation isn’t entirely dire, citing recent government fiscal stimulus, including GST rebates, which could bolster growth. These factors, Jean argued, might prompt the Bank of Canada to wait before implementing another significant rate cut.
October’s inflation reading came in higher than anticipated, particularly for core services excluding shelter. The annualised three-month rate rose from 2.3 percent to 2.8 percent.
Jean acknowledged that while inflation is near the central bank’s target of 2 percent, the battle against inflation isn’t over. This ongoing concern may push the central bank to opt for a more conservative 25-basis-point cut instead of a larger reduction.
Regarding tariff threats and their potential impact, Jean stated that the Bank of Canada typically responds to enacted policies rather than perceived risks. However, if significant tariffs materialise, they could weigh heavily on Canada’s growth.
Jean suggested that such developments might compel the central bank to accelerate rate cuts to counteract the economic headwinds. The interplay between growth risks and inflationary pressures would require careful consideration.
Currency fluctuations are another factor in the central bank’s calculus. Jean highlighted the Canadian dollar’s depreciation by nearly six percent since the start of the year.
If tariffs further weaken the currency, it could serve as a buffer for the economy, reducing the need for aggressive rate cuts.
The Federal Reserve’s slower pace of rate cuts could widen the policy divergence between Canada and the US, increasing pressure on the Canadian dollar.
Jean pointed out that such a scenario would elevate inflation and necessitate a strategic response from the Bank of Canada. He suggested that the bank would incorporate these dynamics into its decision-making process to ensure stability.
