- Canada's labor market weakened sharply in September, with employment falling by 68,300 jobs and the unemployment rate rising to 6.5%, raising questions about whether the Bank of Canada will delay further interest rate increases.
The unexpected decline, reported by Statistics Canada on October 9, followed a loss of 41,700 jobs in August. Economists had expected employment to increase by 9,200 positions, Reuters reported.
The figures complicate the outlook for monetary policy as the central bank weighs slowing employment against persistent inflation pressures, elevated energy prices and uncertainty surrounding trade with the United States.
Canada's Job Losses Raise Questions About Bank of Canada Rates
The September employment decline erased the gains recorded earlier in the year, leaving employment down by a net 41,200 jobs since December 2025. By comparison, Canada added 211,300 jobs over the same period in 2025, Reuters reported.
The unemployment rate increased to 6.5% from 6.4% in August. Statistics Canada also reported that the employment rate fell 0.2 percentage points to 60.6%, while the labor force participation rate declined to 64.8%, its lowest level in nearly three decades outside the pandemic period.
Young workers experienced the largest employment decline. Employment among people aged 15 to 24 fell by approximately 48,000 positions, while employment among women aged 25 to 54 decreased by 28,000.
Education, health care and social assistance also recorded significant declines. Manufacturing employment fell by about 12,700 positions, adding to concerns about the outlook for Canadian businesses exposed to weaker demand and trade uncertainty.
The figures arrive ahead of the Bank of Canada's next interest rate announcement on October 28. The central bank held its overnight policy rate at 2.25% on September 2, but its latest policy statement highlighted competing risks from inflation, energy prices and US tariffs.
A weaker labor market generally gives central banks more reason to avoid raising borrowing costs because higher rates can further restrain consumer spending, business investment and hiring. However, that does not guarantee a rate cut or rule out an increase if inflation remains elevated.
Following the employment report, financial markets reduced expectations for an October rate hike. Reuters reported that investors were still pricing in the possibility of an increase in December, reflecting uncertainty over how the central bank will balance weaker employment against inflation risks.
The Canadian dollar also weakened after the figures were released, falling to an 18-month low against the US dollar. Two-year Canadian government bond yields declined as investors reassessed the outlook for monetary policy.
Inflation and Energy Prices Could Complicate the Rate Outlook
The employment figures strengthen the case for caution, but inflation remains a key consideration for policymakers. The Bank of Canada has warned that higher energy prices could spread into other consumer prices if they persist. It has also highlighted the potential for new US tariffs and Canadian countermeasures to increase costs for businesses and households.
That creates a difficult policy balance with keeping rates elevated for longer could help restrain inflation but also weigh on hiring, investment and economic growth. Raising rates while employment is weakening could add further pressure to the economy, while easing policy too soon could risk allowing inflation to accelerate.
Wage growth provides another signal for policymakers. Statistics Canada reported that average hourly wages for permanent employees increased 2.3% year over year in September, compared with 2.0% in August. Faster wage growth could support household incomes, but the Bank of Canada will also assess whether labor costs are adding to inflation pressures.
The next inflation data and the central bank's assessment of economic growth will therefore be important in determining whether the September jobs report changes the policy outlook materially. Investors will also watch for signs that the weakness extends beyond public-sector employment and younger workers.
For households, the decision has direct implications for borrowing costs. Changes in the overnight rate influence variable-rate loans and lines of credit, while fixed mortgage rates are more closely tied to bond yields and expectations for future interest rates. The direction of Canadian mortgage borrowing costs will therefore depend on how markets interpret the employment data alongside inflation and growth.
For now, the September report gives the Bank of Canada another reason to proceed cautiously. Two consecutive months of job losses point to weaker labor-market momentum, but persistent inflation risks mean policymakers may need more evidence before changing the direction of interest rates at the October 28 meeting.