(Ottawa) As warnings of a potential recession grow louder, the Bank of Canada is expected to announce another major interest rate hike next Wednesday.
Royal Bank of Canada chief economist Nathan Janzen expects the Bank of Canada to choose between raising its key interest rate by half a percentage point or three-quarters of a percentage point, although RBC is leaning towards a lower increase.
Wednesday’s announcement would be the sixth straight time the Bank of Canada has raised interest rates this year in response to the highest inflation in decades. It also comes amid growing fears that a recession is looming.
Last week, Finance Minister Chrystia Freeland changed her tone on the economy from her usual praise for Canada’s strong economic recovery in the wake of the COVID-19 pandemic. She warned that difficult times are ahead for Canadians. “Mortgage payments will go up. Business is no longer booming,” Freeland said. “Our unemployment rate will no longer be at its lowest level. »
In addition to the interest rate decision, the Bank of Canada will release updated economic projections in its latest quarterly monetary policy report. The central bank’s outlook on inflation will be key to its plans for any further rate hikes to come.
Since last March, the Bank of Canada has raised its key interest rate from 0.25% to 3.25%, which has resulted in higher borrowing costs for Canadians and businesses.
And although inflation has slowed in recent months thanks to a pullback in gasoline prices, the central bank has made it clear that it doesn’t believe its job is done just yet.
“Put simply, there’s still a lot to do,” Bank of Canada Governor Tiff Macklem said during a speech in Halifax on Oct. 6.
Central bank officials have expressed concern over high inflation and its impact on consumer and business expectations of future inflation.
In September, the annual inflation rate eased slightly to 6.9%, although the bank’s preferred core inflation measures, which tend to be less volatile, remained unchanged from August. Grocery prices also continued to climb, with the cost of food rising 11.4% from a year ago.
However, there is good news for the Bank of Canada on the inflation expectations front. Its recent business outlook survey showed that companies expect wages and prices to rise more slowly as their overall inflation expectations ease.
The good news, however, will not be enough to deter the bank from another big rate hike, according to Nathan Janzen. “Inflation rates are still too high right now to prevent further interest rate increases.”
Most commercial banks expect another interest rate hike after October before the bank pauses in one of its most aggressive rate hike cycles in history.
The effect of these rate hikes should be felt more broadly in the economy next year as Canadians and businesses adjust their spending.
Although there is some division among economists on the severity of the impending economic downturn, many economists believe the risks of a recession have increased. Recent Bank of Canada polls show that most Canadians and businesses also believe a recession is in the offing.
However, many economists have pointed out that Canada’s tight labor market could act as a buffer in the event of an economic downturn. In September, the unemployment rate was 5.2%, which is considered quite low.
Although the Bank of Canada has previously spoken of aiming for a “soft landing”, where inflation declines without triggering a serious economic slowdown, Governor Macklem has said in recent weeks that the bank’s main objective is to restore price stability. The pledge has raised concerns among labor groups, who have come out against the aggressive course of raising rates for fear of the potential impact of a recession on jobs.
A new report from the Center for Future Work in conjunction with the Canadian Labor Congress (CLC) calls on the Bank of Canada to hold off on rate hikes until it can assess the impact of interest rate hikes. previous interest on the economy. “After three years of coping with both the health and economic consequences of an unprecedented pandemic, the last thing Canadians can tolerate is another recession,” reads the report by Jim Stanford, economist and director of the Center for Future Work.
Instead of continuing down the path of higher interest rates, Stanford recommends that the Bank of Canada balance its goal of restoring low and stable inflation while promoting economic growth and maintaining jobs.
It also calls on the federal government to take a more active role in fighting inflation by exploring options such as tax increases on high earners and windfall taxes on profitable corporations.