OTTAWA –
Even as warnings a few potential recession develop louder, the Bank of Canada is expected to announce one other hefty curiosity rate hike on Wednesday, edging the financial institution nearer to the tip of one of the quickest financial coverage tightening cycles in its historical past.
RBC senior economist Nathan Janzen says it is a coin toss between the Bank of Canada selecting to lift its key curiosity rate by half a proportion level or three-quarters of a proportion level, although RBC is leaning towards the smaller improve.
“It’s pretty clear that more aggressive interest rate hikes are still warranted,” Janzen stated.
Wednesday’s announcement would make it the sixth consecutive time the Bank of Canada raises rates of interest this 12 months in response to decades-high inflation. It additionally comes amid rising fears {that a} recession is looming.
Last week, Finance Minister Chrystia Freeland shifted her tone on the financial system from her common praises of Canada’s sturdy pandemic financial restoration. She warned powerful occasions are forward for Canadians.
“Mortgage payments will rise. Business will no longer be booming,” Freeland stated. “Our unemployment rate will no longer be at its record low.”
As properly because the curiosity rate determination, the Bank of Canada may even launch up to date financial projections on Wednesday in its newest quarterly financial coverage report. The central financial institution’s outlook on inflation will probably be key to its plans for any extra rate hikes to return.
Since March, the Bank of Canada has raised its key curiosity rate from 0.25 to three.25 per cent, feeding into larger borrowing prices for Canadians and companies.
And though inflation has been slowing in latest months because of tumbling fuel costs, the central financial institution has made it clear it does not consider its job is completed simply but.
“Simply put, there is more to be done,” Bank of Canada governor Tiff Macklem stated throughout a speech in Halifax on Oct. 6.
As the Bank of Canada raises rates of interest to deliver inflation again to its two per cent goal, officers on the central financial institution have expressed concern about how excessive inflation nonetheless is and its influence on shopper and enterprise expectations for future inflation.
In September, the annual inflation rate slowed to six.9 per cent, although the financial institution’s most well-liked core measures of inflation, which are usually much less unstable, have been unchanged from August.
Grocery costs additionally continued to climb, with the fee of meals up a staggering 11.4 per cent in contrast with a 12 months in the past.
There is a few excellent news for the Bank of Canada on the inflation expectations entrance. Its latest enterprise outlook survey confirmed companies count on wages and costs to rise extra slowly as their total inflation expectations have eased.
The excellent news, nonetheless, will not be sufficient to dissuade the financial institution from one other sizable rate hike, Janzen stated.
“There are some indicators that we’re past peak inflation rates. It’s just those inflation rates are still too high, currently, and still way too broad right now to prevent additional interest rate increases,” Janzen stated.
Most industrial banks count on yet another curiosity rate hike after October earlier than the financial institution hits pause on one of its most aggressive rate-hiking cycles in historical past.
The impact of these rate hikes is expected to be felt extra broadly within the financial system subsequent 12 months as Canadians and companies modify their spending.
While there’s some division amongst economists on how extreme the upcoming financial slowdown will probably be, many economists estimate the possibilities of a recession have grown.
Recent surveys from the Bank of Canada reveal most Canadians and companies additionally consider a recession is on the way in which.
However, many economists have highlighted that Canada’s tight labour market may function a buffer throughout an financial downturn. In September, the unemployment rate was 5.2 per cent, which is taken into account to be fairly low.
Although the Bank of Canada has beforehand spoken about aiming for a “soft landing,” the place inflation comes down with out triggering a severe financial slowdown, Macklem stated in latest weeks that the first aim of the financial institution is to revive worth stability.
That dedication has sparked worries in labour teams, which have come out towards the aggressive rate-hiking path over issues in regards to the potential influence of a recession on employment.
A brand new report by the Centre for Future Work in collaboration with the Canadian Labour Congress is looking on the Bank of Canada to pause its rate hikes till it could possibly assess the influence of earlier curiosity rate will increase on the financial system.
“After three years of dealing with both the health and the economic consequences of an unprecedented pandemic, the last thing Canadians can tolerate is another recession,” the report by Jim Stanford reads.
Stanford, an economist and the director of the Centre for Future Work, makes the case within the report for a distinct method to addressing excessive inflation.
Instead of persevering with alongside the trail of larger rates of interest, Stanford recommends the Bank of Canada stability its aim of restoring low and steady inflation with selling financial progress and sustaining employment.
In the report, Stanford additionally calls on the federal authorities to play a extra lively function in preventing inflation by exploring choices resembling tax will increase on high-income earners and windfall taxes on worthwhile firms.
This report by The Canadian Press was first printed Oct. 24, 2022.