Even as warnings about a potential recession grow louder, the Bank of Canada is expected to announce another hefty interest rate hike on Wednesday, edging the bank closer to the end of one of the fastest monetary policy tightening cycles in its history.
RBC senior economist Nathan Janzen says it’s a coin toss between the Bank of Canada choosing to raise its key interest rate by half a percentage point or three-quarters of a percentage point, though RBC is leaning toward the smaller increase.
“It’s pretty clear that more aggressive interest rate hikes are still warranted,” Janzen said.
Economists at BMO, CIBC, National Bank, Scotiabank and TD are expecting a 75-basis-point hike on Wednesday after the release last week of September’s inflation figure showed prices continuing to rise.
BMO senior economist Robert Kavcic wrote in a report that the “stubbornly strong” core inflation reading “isn’t going to sit well in Ottawa.”
Wednesday’s announcement would make it the sixth consecutive time the Bank of Canada raises 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 shifted her tone on the economy from her usual praises of Canada’s strong pandemic economic recovery. She warned tough times are ahead for Canadians.
“Mortgage payments will rise. Business will no longer be booming,” Freeland said. “Our unemployment rate will no longer be at its record low.”
As well as 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 additional rate hikes to come.
“We will be keenly attentive to any change in the BoC’s inflation forecast given the impact this is having on sentiment,” the TD report stated.
Consumers expect inflation to remain high, and “[t]his should keep the BoC’s tone very hawkish as it needs to cement pricing for higher interest rates in order to bring down expectations for future inflation,” TD said.
Since March, the Bank of Canada has raised its key interest rate from 0.25% to 3.25%, feeding into higher borrowing costs for Canadians and businesses.
And although inflation has been slowing in recent months thanks to tumbling gas prices, the central bank has made it clear it doesn’t believe its job is done just yet.
“Simply put, there is more to be done,” Bank of Canada governor Tiff Macklem said during a speech in Halifax on Oct. 6.
As the Bank of Canada raises interest rates to bring inflation back to its 2% target, officials at the central bank have expressed concern about how high inflation still is and its impact on consumer and business expectations for future inflation.
In September, the annual inflation rate slowed to 6.9%, though the bank’s preferred core measures of inflation, which tend to be less volatile, were unchanged from August.
Grocery prices also continued to climb, with the cost of food up a staggering 11.4% compared with a year ago.
There is some good news for the Bank of Canada on the inflation expectations front. Its recent business outlook survey showed businesses expect wages and prices to rise more slowly as their overall inflation expectations have eased.
The good news, however, won’t be enough to dissuade the bank from another sizable rate hike, Janzen said.
“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 said.
Most commercial banks expect one more interest rate hike after October before the bank hits pause on one of its most aggressive rate-hiking cycles in history.
The effect of these rate hikes is expected to be felt more broadly in the economy next year as Canadians and businesses adjust their spending.
While there is some division among economists on how severe the impending economic slowdown will be, many economists estimate the chances of a recession have grown.
Recent surveys from the Bank of Canada reveal most Canadians and businesses also believe a recession is on the way.
However, many economists have highlighted that Canada’s tight labour market might serve as a buffer during an economic downturn. In September, the unemployment rate was 5.2%, which is considered to be quite low.
Although the Bank of Canada has previously spoken about aiming for a “soft landing,” where inflation comes down without triggering a serious economic slowdown, Macklem said in recent weeks that the primary goal of the bank is to restore price stability.
That commitment has sparked worries in labour groups, which have come out against the aggressive rate-hiking path over concerns about the potential impact of a recession on employment.
A new report by the Centre for Future Work in collaboration with the Canadian Labour Congress is calling on the Bank of Canada to pause its rate hikes until it can assess the impact of previous interest rate increases on the economy.
“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 in the report for a different approach to addressing high inflation.
Instead of continuing along the path of higher interest rates, Stanford recommends the Bank of Canada balance its goal of restoring low and stable inflation with promoting economic growth and maintaining employment.
In the report, Stanford also calls on the federal government to play a more active role in fighting inflation by exploring options such as tax increases on high-income earners and windfall taxes on profitable corporations.