Canada's latest employment data, released on Friday, surprised markets with unexpected strength, prompting a reassessment of monetary policy expectations. As the labor market rebounded sharply in November, traders shifted from pricing in further rate cuts to anticipating potential rate hikes by the Bank of Canada (BoC) next year.
Overnight Index Swaps (OIS) markets now fully price in the possibility of a rate hike by October 2026—a stark reversal from just a day earlier, when investors still expected Governor Tiff Macklem and his team to continue lowering borrowing costs over the next year.
The shift was driven by Canada's unemployment rate unexpectedly dropping 0.4 percentage points in November, alongside job growth that exceeded all economists' forecasts. This signals an economic recovery from earlier weakness caused by trade tensions and U.S. tariffs.
The data triggered a broad sell-off in Canadian bonds, with the five-year yield surging 20 basis points intraday, reflecting rapid market repricing of future monetary tightening.
Andrew Grantham, an economist at CIBC, noted that the jobs report "clearly shows the economy is rebounding," suggesting "the BoC’s rate-cutting cycle is likely over." The central bank had previously hinted that its easing phase was nearing an end. In October, it cut rates by 25 basis points but stated that, if inflation and growth align with projections, current rates are "broadly appropriate."
Policymakers also warned that ongoing U.S. trade disputes and structural shocks from tariffs could limit further economic support, especially if tariffs reignite price pressures. However, officials emphasized flexibility to respond to significant shifts in inflation or growth.
While markets swiftly adjusted expectations, Canadian consumers remain divided. A Nanos Research survey found 44% expect rates to hold at 2.25% over the next year, 31% anticipate at least one more cut, and only 9% foresee hikes, with nearly 20% uncertain.
Such divergence may weaken monetary policy transmission—for instance, if households delay major purchases awaiting lower rates. The survey also revealed demographic splits: nearly half of women and over half of respondents aged 55+ expect rates to stay unchanged, double those predicting cuts.
The poll of 1,009 Canadians, conducted November 29–December 2, has a ±3.1% margin of error. The BoC’s next rate decision is due December 10, with economists and markets widely expecting no change. Focus will center on whether the bank signals a clearer path toward future hikes.
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