The Bank of Canada should start cutting interest rates again in light of the weakening labour market, according to CIBC Senior Economist Andrew Grantham.

“The weakening of the Canadian labour market in recent months hasn't solely been driven by sectors most sensitive to U.S. tariffs, suggesting that the Bank of Canada needs to recommence interest rate cuts to stimulate demand and hiring within the economy more broadly,” Grantham said in a note.

CIBC is forecasting a cut in September and a further reduction in Q4, “which should help the labour market stabilise towards year-end and bring a gradual recovery in 2026, assuming no further dramatic changes in U.S. trade policy.”

Near decade-high jobless rate

Canada unexpectedly lost 66,000 jobs and the unemployment rate rose to 7.1% in August as the impact of U.S. tariffs was felt across the economy, Statistics Canada reported Friday. It was the highest unemployment rate since May 2016, excluding the pandemic years. In comparison, the unemployment rate averaged 6% from 2017 to 2019.

The bulk of the employment losses — some 60,000 jobs — were in part-time work.

Employment fell across several industries. The professional, scientific and technical services industry lost 26,000 jobs, while transportation and warehousing lost 23,000 positions. But construction employment rose by 17,000.

Economists had expected modest gains in employment last month, and the disappointing August numbers will increase the likelihood of a Bank of Canada rate cut at the Sept. 17 meeting, Grantham said.

“The weaker than expected employment report saw financial markets pricing in a greater probability of a September interest rate cut, resulting in a decline in bond yields. However, the Canadian dollar was little changed against its U.S. counterpart, as U.S. payrolls figures also printed well below consensus expectations,” Grantham said.