The Bank of Canada’s interest rate drop is a response to a seven-year high of unemployment

With unemployment reaching its highest level since 2017 excluding the pandemic, this week the Bank of Canada lowered the overnight rate 50 basis points for the second time in a row.

The significant interest cut to 3.25 percent, the third 50 basis point cut this year, is part of Bank of Canada governor Tiff Macklem’s plan to “stick the landing” on inflation.

Weaker than anticipated third-quarter Canadian GDP growth and global market uncertainties caused by recent U.S. tariff threats prompted the cut according to a Bank of Canada’s media release.

“With rates now back in the Bank of Canada’s neutral range and inflation at 2 percent, governor Macklem was clear that moving forward, the Bank will take a more measured approach to policy easing, which likely means more 50 basis point cuts are off the table for now,” said Oxford Economics Canada’s Julio Urdaneta.

The interest rate cut comes as the percentage of unemployed Canadians reaches its highest level in years, which was another reason given for the cut.

In November, the unemployment rate (number of unemployed people as a share of Canada’s labour force) climbed from 6.5 to 6.8 percent, according to the Labour Force Survey released last week. That’s the highest unemployment rate reported since September 2021 during the COVID-19 pandemic, when unemployment was 7 percent.

Excluding the COVID-19 pandemic, January 2017 was the last time the unemployment rate reached 6.8 percent. (Back then, unemployment had been declining from an early 2016 peak of 7.3 percent, the result of record-low energy prices and sluggish global growth.)

This week’s 50 basis point reduction in borrowing costs could improve companies’ capacity to generate income and hire.

Last month’s unemployment rate climbed to 6.8 percent due to significant job losses across the private sector—manufacturing lost 29,000 jobs, transportation 19,000, and natural resources 6,300. Meanwhile, the share of those participating in the labour force (working or looking for a job) rose, exceeding the number of jobs available.

The significant interest rate reduction can also be seen as the Bank of Canada acknowledging that recent high interest rates have weakened Canada’s private sector employment growth.

Economists suggested that November’s 51,000 net new jobs as a justification to keep this week’s interest rate cut to just 25 basis points. However, just about 6,300 of those jobs were in the private sector; the vast majority, 45,000, were public sector jobs.

Since the COVID pandemic, public sector employment growth has rapidly outpaced private sector growth. In the last decade, public sector jobs rose 22 percent from 3.4 million to 4.2 million. Meanwhile, those in the private sector rose just 11 percent from 14.2 million to 15.9 million.

The public sector often leads the way when it comes to recovering from recessions, but its bounce back as the pandemic has waned has been historically unprecedented.