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(Bloomberg) — Canada’s unemployment rate fell as businesses hired more workers than expected, supporting the central bank’s case for gradual rate cuts even as some observers called for a more aggressive pace.

The jobless rate dropped to 6.5% in September as the country added 46,700 new positions, Statistics Canada reported Friday. Economists in a Bloomberg survey had expected unemployment to tick up to 6.7% and a gain of 27,000 jobs. 

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It’s the first time the unemployment rate has fallen since January.

The growth was led by full-time positions, which surged by 112,000 on the month, while part-time roles fell by 65,300. The private sector was also a strong driver, adding 61,200 jobs. 

“The Bank of Canada is likely to take a positive view on this morning’s report,” Dominique Lapointe, director of macro strategy at Manulife Investment Management, said by email. “The bank has mentioned the need for private sector job creation to pick up, which it did last month.”

The country’s labor force grew by just 15,900 people, one of the smaller increases in recent months as Canada’s population has surged since the pandemic.

The data suggest there’s surprisingly strong labor demand in an economy that may be already benefiting from the central bank’s rate cuts. The report will add to the Bank of Canada’s case to keep cutting rates gradually, and firm up hopes that it will be able to tame inflation without a deep downturn in employment.

Canadian bonds initially underperformed after the release as yields rose, pushing the two-year Canada benchmark yield as high as 3.156%. The loonie surged before paring those gains to trade at C$1.3770 per US dollar as of 11:56 a.m. in Ottawa. 

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The report won’t discourage the Bank of Canada from continuing to cut rates, said Earl Davis, head of fixed income and money markets at BMO Global Asset Management. 

“The big reason why the Bank of Canada wants to ease is because of the mortgage renewals coming up in 2025 and 2026,” Davis said on BNN Bloomberg Television. The central bank’s policy rate is still in restrictive territory at 4.25%, so it can afford to aggressively chop rates “without adding too much stimulus to the market,” he added. 

Some See Bigger Cut

Statistics Canada said wage growth slowed in September, to 4.5% annually from 4.9% previously. At the same time, hours worked fell 0.4% on the month, pointing to weaker economic growth in the third quarter.

Before the report, traders in overnight swaps put the chances of a 50 basis-point cut at the central bank’s next meeting on Oct. 23 at about 50%. Those odds initially fell on Friday morning before rising back to about a coin flip. 

Former Bank of Canada Deputy Governor Paul Beaudry said earlier this week that he would not be surprised by a 50 basis-point cut at the meeting, while RBC Dominion Securities has called for back-to-back cuts of that size this month and at the December meeting.

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Policymakers led by Governor Tiff Macklem reduced the policy rate by 25 basis points for a third straight time in September and said it was reasonable to expect further cuts. Macklem has said the trend in the labor market has been that employers are not hiring enough to keep pace with labor force growth, and that a “big change in layoffs” would spark concern.

One good month for jobs doesn’t make a trend, Charles St-Arnaud, chief economist at Alberta Central, said in a report to investors. He pointed out that job gains averaged 22,000 over the last three months and participation and employment rates reached their lowest levels since the 1990s.

“We do not believe today’s report will meaningfully change the Bank of Canada’s view of the economy and continue to think a 50 basis-point cut remains appropriate at the October meeting,” he said. 

“However, the better-than-expected job report somewhat reduces the likelihood of this scenario in favor of a smaller 25 basis-point cut.”

Canadian jobs data is “highly volatile” on a monthly basis, strategists at TD Securities said in a report to investors, but the Bank of Canada should see the overall trend as evidence that rate cuts are helping to stabilize labor markets.

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“While we continue to look for a 25 basis-point cut from the bank of Canada at its upcoming rate announcement, the September jobs data shouldn’t be viewed as a decisive factor in that deliberation,” said Robert Both, Chris Whelan and Andrew Kelvin.

This report is the last labor force survey before the next rate decision and inflation figures are due on Tuesday. Most economists in a Bloomberg survey expect a 25 basis-point cut at the bank’s Oct. 23 decision. 

The information, retail and culture sectors as well as wholesale and retail trade led the job gains, while education, health care and agriculture lost the most jobs.

The youth unemployment rate fell to 13.5% in September from 14.5% the previous month. Young people and newcomers have struggled the most to find jobs in Canada this year.

—With assistance from Jay Zhao-Murray, Carter Johnson and Erik Hertzberg.

(Updates with details and quotes throughout, starting in first paragraph.)

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