(Ottawa) Inflation seems to have peaked in the country, but it remains very high and another significant increase in interest rates from the Bank of Canada next week is widely expected.
Posted at 4:52 p.m.
However, some economists believe Wednesday’s rise could be the last for a while.
“We believe that by October, we may be in a comfortable enough position for the Bank to pause and examine how the economy is reacting,” said Karyne Charbonneau, managing director of economics at CIBC. .
September’s decision on the central bank’s key rate comes at a crucial time for the Canadian economy.
With the fall in gas prices, annual inflation stood at 7.6% in July, after having been 8.1% in June. Gross domestic product (GDP) for the second quarter increased from that of the first three months of the year, although the pace of growth slowed towards the end of the period and a preliminary estimate suggests a contraction for the month of July. Meanwhile, the unemployment rate remains at a historically low level.
Despite slowing inflation, Bank of Canada Governor Tiff Macklem said in an Aug. 16 op-ed that high inflation, near a 40-year high, remained a major concern.
Inflation has come down a bit in Canada, but it’s still way too high. We know we still have work to do. We won’t give up until we get inflation back to the 2% target.
Tiff Macklem, Governor of the Bank of Canada
Some of Canada’s big banks expect the central bank to raise the key interest rate by three-quarters of a percentage point on Wednesday to 3.25%.
In a well-attended speech last week, US Federal Reserve Chairman Jerome Powell delivered a clear message on his own rate hike cycle, saying the Fed would likely impose larger interest rate hikes in the coming months. His message warning that the U.S. central bank will remain aggressive on the interest rate file has some observers wondering if the Bank of Canada’s hike could be a full percentage point on Sept. 7.
The impact on indebted households
The bank raised its policy rate in July by a full percentage point — its largest single increase since August 1998 — continuing a series of hikes that began in March. It had spent the previous two years at 0.25%, the level to which the bank had lowered it at the start of the pandemic.
Higher interest rates drive up the cost of loans across the economy, for Canadians and businesses. The central bank hopes that by raising the cost of debt, spending in the economy will slow and inflation will come down.
However, economist David Macdonald of the Canadian Center for Policy Alternatives warns that the rapid pace of increases could have serious repercussions due to the high level of corporate and household debt in the economy.
In his latest analysis, Mr. Macdonald pointed out that private sector debt amounts to 225% of the country’s gross domestic product. By comparison, the last time the bank raised interest rates so quickly was in 1995, when private sector debt stood at 142% of GDP.
This higher debt level, he says, will make it more difficult to achieve the bank’s desired “soft landing,” where interest rate hikes lower inflation without triggering a recession.
“What I really wanted to bring out in this analysis is the fact that private sector debt is much higher today than it was in the 1980s (and) the 1990s and periods previous years where we’ve seen this kind of rapid rate increase,” Macdonald said. And that’s important, of course, because it’s not just the interest rate that matters. The interest rate is charged on something. It is billed on private sector debt. »
Any solutions from the government?
Mr. Macdonald called for alternative solutions to calm inflation, which would come from the federal government rather than central bank policy.
Some of his recommendations include changing mortgage underwriting rules for investors, to cool house prices, and extending the new corporate excess profits tax beyond financial institutions.
However, Christopher Ragan of McGill University’s Max Bell School of Public Policy argued that the central bank was best placed to take responsibility for keeping interest rates low.
“There are very, very good reasons why we have an operationally independent central bank trying to target inflation, rather than governments, because governments in the past have done a very poor job at this. regard,” he said.
Mr. Ragan asserted that the independence of the Bank of Canada allowed it to act forcefully in the face of inflation, whereas any government intervention would be highly political. Nevertheless, the expert admits that bringing inflation down with interest rate hikes is painful.
“That’s actually why it’s so important never to let inflation skyrocket,” Ragan said. Because it’s not just that high inflation is bad, it’s that reducing high inflation to low inflation is very bad. »