Interest rates

How high will the Bank of Canada raise interest rates?

70% of small business owners are feeling the pinch of higher rates

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Whether you are an entrepreneur or aspiring to become one, the Financial Post would like to help you by answering your questions about small business in this uncertain economy. Today we answer a question from Dilip — When can we expect Bank of Canada rates to peak?

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Rising interest rates this year have put pressure not only on Canadian consumers, but also on business owners.

A survey by the Canadian Federation of Independent Business conducted after the Bank of Canada raised its key rate to 3.25% in September found that seven in 10 small business owners expect rate hikes of interest have a negative impact on their activities.

“While keeping inflation at reasonable levels is certainly an important policy objective, the rate hike comes at a time when 62% of small businesses are still struggling with pandemic debt, averaging 158,000 $,” CFIB chief economist Simon Gaudreault said when the poll was released earlier this month.

“Doing business in Canada is becoming too expensive. Rising costs, compounded by rising interest rates and difficulties finding staff, are putting business owners in a tough spot.

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Now, small business owners are bracing for another rate hike from the Bank next week.

The Bank has already raised the policy rate, or the central bank’s interest rate reading that informs the Canadian banking industry’s prime rates they charge consumers, by three percentage points over the course of the year for the increase to 3.25%. How far the Bank of Canada might raise that rate largely depends on the pace of inflation, which has slowed over the past two readings, from a peak of 8.1% in June to its latest reading of 7 .0% in August.

The headline inflation cooling figure is a promising sign, although core inflation remains a concern as all three of its measures have remained warm, with the average of the three hitting a record high of 5.3% in July – much more than the Bank’s two percent. cents goal. Because of this high inflation rate, Bank of Canada Governor Tiff Macklem said his work wasn’t done yet and reiterated the Bank’s determination to bring inflation back into balance.

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At the Jackson Hole symposium, central bankers like US Federal Reserve Chairman Jerome Powell suggested the Fed was ready to trade a few quarters of economic growth if it meant putting a damper on decades-high inflation. The Bank of Canada should adopt the same tactic.

So where will that leave Canada’s forecast policy rate when the central bank eases off the accelerator?

Many economists put the final rate, or the likely rate the Bank will max out before cutting, at 4 or 4.25%. Bank of Canada October 17 business outlook survey and its accompaniment consumer expectations survey found that businesses and consumers expect near-term inflation to persist and a recession to be imminent. Despite the gloom, many economists stuck to their calls for a four percent spike in interest rate hikes, arguing the results could have been much worse.

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Royce Mendes, managing director and head of macro strategy at Desjardins, said those polls gave his team little reason to expect a terminal rate above 4% at this point. Likewise, the The RBC Economics team noted that a darker 2023 will not be enough to dissuade the Bank of Canada from raising rates to 4% by the end of the year after a 50 basis point hike at the end of October.

“Upside surprises next week, whether small improvements in inflation expectations or a deterioration in the real value (of the consumer price index), are likely to tip this to a larger 75 basis point increase,” RBC economists Nathan Janzen and Claire Fan said in October. 14 notes.

However, some economic teams believe that the Bank could go a little further than 4%. The Bank of Nova Scotia’s senior vice-president and chief economist, Jean-François Perrault, and René Lalonde, the bank’s chief forecasting officer, argued in a Note of October 17 that the Bank of Canada should end the year by raising its key rate to 4.25%, largely due to fiscal support measures and the rapid fall of the Canadian dollar.

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Macklem has previously warned that a lagging loonie would make the Bank’s job harder and mean it would have to work even harder through monetary policy to ease domestic cost pressures.

Overall, economists expect rates to peak at 4% or a modest rise, although the trajectory of the central bank’s rate hike cycle depends on the next inflation data to be released. October 19. The Bank of Canada will set its next rate decision on October 26, the Bank’s penultimate rate decision before the end of 2022.

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