Interest rates

Bank of Canada set to raise interest rates on Wednesday as fears of recession grow

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OTTAWA — Even as warnings about a potential recession grow louder, the Bank of Canada is expected to announce another big interest rate hike on Wednesday, bringing the bank closer to the end of one of the tightening cycles. fastest monetary policy in its history.

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RBC chief economist Nathan Janzen says it’s a toss-up between the Bank of Canada choosing to raise its key interest rate by half a percentage point or three-quarters of a percentage, although RBC is leaning toward a smaller increase.

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“It’s pretty clear that more aggressive interest rate hikes are still warranted,” Janzen said.

Wednesday’s announcement would make it the sixth consecutive time the Bank of Canada has raised interest rates this year in response to decades-high inflation. 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 of Canada’s strong pandemic economic recovery. She warned that difficult times are ahead for Canadians.

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“Mortgage payments will go up. Business will no longer be 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 also release updated economic projections on Wednesday 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 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 falling gasoline prices, the central bank has made it clear that it doesn’t believe its job is done just yet.

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“Put simply, there’s still a lot to do,” Bank of Canada Governor Tiff Macklem said during a speech in Halifax Oct. 6.

As the Bank of Canada raises interest rates to bring inflation back to its 2% target, central bank officials have expressed concern about high inflation and its impact on consumer expectations. consumers and businesses about future inflation.

In September, the annual inflation rate slowed 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.

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 have eased.

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The good news, however, won’t be enough to deter the bank from another big rate hike, Janzen said.

“Some indicators indicate that we have passed the peaks of inflation. It’s just that those inflation rates are still too high, right now, and still too wide right now to prevent further interest rate increases,” Janzen said.

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.

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Recent Bank of Canada polls show that most Canadians and businesses also believe a recession is on the way.

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 falls without triggering a serious economic slowdown, Macklem has said in recent weeks that the bank’s main objective is to restore stability to the price.

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.

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A new report from the Center for Future Work in collaboration with the Canadian Labor Congress calls on the Bank of Canada to suspend rate hikes until it can assess the impact of previous interest rate hikes 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,” read Jim Stanford’s report.

Stanford, an economist and director of the Center for Future Work, argues in the report for a different approach to tackling high inflation.

Instead of continuing down the path of higher interest rates, Stanford recommends the Bank of Canada balance its goal of restoring low and stable inflation while promoting economic growth and maintaining jobs.

In the report, Stanford 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.

This report from The Canadian Press was first published on October 24, 2022.

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