The Bank of Canada is anticipated to announce another substantial interest rate hike on Wednesday, bringing the bank closer to the end of one of the swiftest monetary policy tightening cycles in its history even as warnings about a future recession become louder.
While RBC is leaning toward the lesser rise, senior economist Nathan Janzen of RBC believes it’s a coin toss whether the Bank of Canada decides to boost its benchmark interest rate by half a percentage point or three-quarters of a percentage point.
It’s rather obvious that additional aggressive interest rate increases are still necessary, according to Janzen.
With the announcement on Wednesday, the Bank of Canada will have increased interest rates six times in a row this year in response to inflation that is at a historic high. Additionally, there are rising concerns that a recession is imminent.
Chrystia Freeland, Canada’s finance minister, took a different stance on the economy last week than she usually does, downplaying the country’s robust recent economic recovery. She sent a dire warning to Canadians.
Mortgage obligations will increase. Business won’t be flourishing anymore, according to Freeland. “Our unemployment rate won’t be at a record low forever.”
In its most recent quarterly monetary policy report, the Bank of Canada will also publish revised economic estimates on Wednesday in addition to the decision on interest rates. The central bank’s expectations for future inflation will be crucial to its plans for future rate increases.
The Bank of Canada has increased its benchmark interest rate from 0.25 percent to 3.25 percent since March, which has resulted in higher borrowing costs for Canadians and businesses.
And despite the fact that inflation has slowed recently as a result of falling gas prices, the central bank has made it clear that it does not yet feel that its work is complete.
Tiff Macklem, governor of the Bank of Canada, stated during a speech in Halifax on October 6 that “simply put, more needs to be done.”
Officials at the central bank have expressed concern about how high inflation is still and its effects on consumer and company expectations for future inflation as the Bank of Canada hikes interest rates to bring inflation back to its two percent objective.
Although the preferred core measures of inflation, which tend to be less volatile, were constant from August, the annual inflation rate dropped to 6.9% in September.
The cost of food has increased by a startling 11.4% over the course of the past year, which is another increase in grocery prices.
On the front of inflation expectations, there are some encouraging developments for the Bank of Canada. According to its most recent business outlook poll, businesses now anticipate wages and prices will increase more gradually as overall inflation predictions have decreased.
The excellent news won’t stop the bank from making another significant rate increase, according to Janzen.
“There are some signs that the peak inflation rates have passed. It’s just that those inflation rates are still too high and still too widespread right now to stop further increases in interest rates, according to Janzen.
After October, the majority of commercial banks anticipate the bank will stop one of its most aggressive rate-hiking cycles in history.
The economy is anticipated to see the effects of these rate increases more extensively next year as Canadians and businesses shift their spending.
While experts disagree on the extent of the upcoming economic slowdown, many believe the likelihood of a recession has increased.
Most Canadians and businesses, according to recent studies by the Bank of Canada, think a recession is coming.
However, a lot of economists have emphasised how Canada’s competitive labour market might act as a safety net in the event of a slump. The unemployment rate in September was 5.2%, which is seen as being rather low.
Although the Bank of Canada has previously mentioned wanting to have a “soft landing,” in which inflation declines without causing a significant slowdown in the economy, Macklem has recently stated that the bank’s main objective is to bring back price stability.
Concerns about the potential effects of a recession on employment have led labour groups to oppose the aggressive rate-hiking path as a result of that pledge.
The Bank of Canada is being urged to hold off on raising interest rates until it can evaluate the effects of earlier rate hikes on the economy in a new report from the Centre for Future Work and the Canadian Labour Congress.
The research by Jim Stanford states that “after three years of dealing with both the health and economic effects of an unparalleled epidemic, the last thing Canadians can accept is another recession.”