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Bank of Canada | The end of rate hikes is in sight



The Canadian economy is showing signs of slowing down, but the Bank of Canada is staying the course and continuing its fight against inflation. With this new increase of 50 basis points, the sixth since the start of the year, the key rate stands at 3.75%, the highest level since 2008.

Why another rate hike?

Price increases are starting to slow, but the inflation rate is still too high, Bank of Canada Governor Tiff Macklem told a news conference following the announcement of the price hike. policy rate. The rise in prices is widespread, he stressed, noting that two-thirds of the components of the consumer price index are up by more than 5%.

The Bank of Canada acknowledges that rate hikes are starting to weigh on growth, but not enough yet. She points to the high number of vacancies and the existence of widespread labor shortages. The unemployment rate has started to rise, but at 5.2% it remains at a relatively low level historically.

The economy is overheating, summarizes the governor.

Households and businesses want to buy more goods and services than the economy is capable of producing, and this drives up prices.

Tiff Macklem, Governor of the Bank of Canada

For these reasons, the central bank considers it appropriate to increase its key rate by 50 points after raising it by 100 basis points, or “to go from a very big jump to a big jump”, in the words of the governor. .

How many more hikes are yet to come?

Contrary to what many hope, this 50-point hike in the key rate will not be the last. “We also expect the policy rate to rise further,” Tiff Macklem said. But it could be the penultimate.

The governor suggests that monetary tightening is coming to an end. “We are closer to the end of the restrictions, but we are not there yet,” he said.

After the last three increases of 100, 75 and 50 points, the next increase in the key rate, scheduled for December 7, could be more “normal”, i.e. by 25 points, the governor hinted. The decision will depend on the reaction of demand and inflation to the previous six rate hikes.

According to Royal Bank economist Josh Nye, the central bank’s speech indicates that a final 25-point hike will take the key rate to 4% in December, after which there will be a pause to assess the impact of the rapid tightening of monetary conditions on the economy.

Can a recession be avoided?

The Governor of the Bank of Canada did not utter the word beginning with R, but it is just like. He said he expects the economy to post negative growth “for a few quarters,” but not a severe contraction.

In his Monetary Policy Report Released alongside the rate decision, the Bank of Canada cut its growth forecast for the Canadian economy in 2023 in half. It now forecasts anemic growth of less than 1%.

Desjardins predicts that this growth forecast for 2023 will be further revised downwards, “which will bring it closer to our recession forecasts,” commented Randall Bartlett, its senior director, Canadian economy.

The central bank governor says he is aware that many Canadian households are hurting as mortgage rates rise and household and business spending is falling. “But we need this slowdown,” he reiterated.

When will the return to an inflation rate of 2%?

To those who accuse him of doing too much to fight inflation, the central bank governor retorts that his mandate is to ensure that inflation will return to the 2% target.

“Inflation is not going to go away on its own,” he said. The Bank of Canada has tough decisions to make and “the independence of the Bank of Canada becomes more important when there are tough decisions to make”.

The Bank of Canada forecasts that the inflation rate will remain high, around 7%, by the end of the year, before decreasing to 3% at the end of 2023. The return to the 2% target is expected for the end of 2024. These are slightly more optimistic estimates than the previous ones, which date back to July.

There are signs that inflationary pressures are fading, opined Randall Bartlett of Desjardins. “Commodity prices have fallen since the Monetary Policy Report of July and the disruptions in the supply chains are subsiding,” he pointed out.

Sébastien Lavoie, chief economist of the Laurentian Bank, believes that the inflation rate may drop below 3% sooner than the Bank of Canada forecasts, in the middle of 2023 rather than at the end.

The inflation rate measured by Statistics Canada’s consumer price index fell from a peak of 8.1% in June to 6.9% in September.

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