Weak Jobs Report Adds Pressure on Bank of Canada, but Inflation Still Holds the Key
Ottawa, Canada – Canada’s labor market delivered another blow in August, shedding 65,500 jobs and pushing the unemployment rate to 7.1%, the highest since May 2016 outside the pandemic years, according to Statistics Canada’s Labour Force Survey released today. The dismal report has intensified pressure on the Bank of Canada (BoC) to consider further interest rate cuts, though economists emphasize that the upcoming inflation data will be the decisive factor in the central bank’s next move.
The job losses, which far exceeded economists’ expectations of a modest 10,000 job gain, marked the second consecutive month of declines, following a 41,000 drop in July. The unemployment rate rose 0.2 percentage points from 6.9%, with part-time positions bearing the brunt, declining by 60,000, while full-time employment remained largely unchanged. Key sectors like professional, scientific, and technical services (-26,100), transportation and warehousing (-22,700), and manufacturing (-19,200) led the downturn, though construction added a modest 17,000 jobs.
“This is arguably the weakest jobs report since the pandemic,” said Douglas Porter, chief economist at BMO, noting that the headline numbers were “mostly weak” despite some resilience in underlying metrics like a 0.9% year-over-year increase in total hours worked and a 3.2% rise in average hourly wages to $36.31.
The labor market’s deterioration, driven partly by trade war impacts, has fueled speculation of a BoC rate cut at its September 17, 2025, meeting, with market odds jumping to 85% following the report. However, economists caution that the BoC’s focus remains on inflation, with the Consumer Price Index (CPI) data due September 16, 2025, expected to be the linchpin for any policy shift.
“While the soft jobs data aligns with the BoC’s view of an excess supply of labor, markets are now pricing in a September cut, but the inflation report will cement the timing,” said Leslie Preston, senior economist at TD. Scotiabank’s Derek Holt added, “A meaningful decline in employment is taken dovishly by the BoC, but inflation remains the key.”
The BoC, which has already implemented three consecutive 25-basis-point rate cuts since June, bringing the overnight rate to 4.25%, faces a delicate balancing act. Inflation, reported at 1.9% in June with core measures at 2.5%, remains close to the BoC’s 2% target but shows signs of stickiness due to trade-related cost pressures. The trade war, particularly U.S. tariffs, has hit manufacturing hard, with 58,100 jobs lost in the sector over the past seven months.
Despite the labor market’s weakness, some resilience persists. “Canada’s relatively low average tariff rate under CUSMA and healthy consumer spending suggest a broad-based contraction isn’t imminent,” said Claire Fan, senior economist at RBC. However, regional disparities are stark, with Ontario, British Columbia, and Alberta seeing the largest job losses, and cities like Windsor (11.1% unemployment), Oshawa (9.0%), and Toronto (8.9%) feeling the trade war’s brunt.
The BoC’s July 2025 Monetary Policy Report noted that economic activity contracted by 1.5% in Q2 2025, driven by a sharp drop in exports, but consumer spending and government outlays have provided some offset. With inflation expectations elevated among households and new costs emerging from trade disruptions, the central bank remains cautious.
As the September 17 meeting looms, the BoC must weigh the labor market’s slack against inflationary pressures. “The Bank of Canada will need to balance increased economic slack with core inflation slightly above target,” noted CIBC’s Andrew Grantham. A softer CPI could tip the scales toward further easing, while persistent inflation might keep rates steady.
For now, Canadians face a softening economy with rising unemployment, particularly in trade-sensitive regions. The BoC’s next steps hinge on whether inflation cools enough to justify action, making the upcoming CPI report a critical moment for monetary policy.
Sources: Canadian Mortgage Trends, Morningstar, Statistics Canada, RBC, CIBC, Scotiabank, BMO