Posted at 6:00 a.m.
Inflation is showing signs of easing, but the Bank of Canada is continuing its fight and on Wednesday raised its key rate by 75 basis points to 3.25%.
Is the Bank of Canada now ready to take a break to assess the impact of rate hikes?
No. Even though many economists were expecting the Bank of Canada to take the time to assess the impact of its five consecutive hikes, the message contained in Wednesday’s announcement is very clear. “Given the outlook for inflation, the Governing Council still believes that the key rate will have to increase further,” said the monetary authorities.
Aside from the price of gasoline, which has fallen, “price pressures have become more widespread, particularly on the services side”, which justifies further increases, according to the central bank. It gives no sign that the next increases could be less significant.
The inflation rate went from 8.1% in June to 7.6% in July, while the Bank of Canada wants to bring it back to its target of 2%.
BLAIR GABLE PHOTO, REUTERS ARCHIVES
Tiff Macklem, Governor of the Bank of Canada
Why is the interest rate now considered “restrictive”?
At 3.25%, the policy rate is currently at its highest level since 2008. It has passed beyond the neutral zone, i.e. the level at which it does not have the effect of stimulating or slow economic growth. This neutral zone is between 2% and 3%, according to the monetary authorities. At 3.25%, the key rate now exceeds this critical threshold and we can expect the cost of credit to significantly curb the growth of the Canadian economy, which is still solid, with a growth rate of 3. 3% in the second quarter of 2022.
What impact have the rate hikes had so far?
The real estate market felt the impact of the rise in interest rates first. Activity in the real estate market has calmed down and prices have begun to decline in major markets across the country.
Homeowners who have a variable rate mortgage or home equity line of credit are immediately affected by the 75 basis point increase announced on Wednesday. Those with a fixed-rate mortgage should expect to collect an increase in their rate when renewing their loan.
Consuming on credit has also become more expensive with the successive increases in interest rates, which have immediate repercussions on the cost of credit.
The leaders of the major Canadian banks gathered in Toronto on Wednesday noted that rate hikes have really started to slow demand and that spending on credit cards is slowing.
Is a recession upon us?
As rates rise, so does the risk of recession. Estimated at 50% by most economists at the start of the rise in interest rates, this risk is becoming increasingly predominant in expert forecasts. A recession is defined as two consecutive quarters of negative growth.
At the National Bank, economists note that the risk of recession has increased in recent weeks, but its CEO, Laurent Ferreira, expects a slowdown rather than a recession.
Desjardins economists forecast a slight recession for the Canadian economy in early 2023. In Quebec, where signs of the economy’s slowing are increasing, the recession could be avoided, according to them, because the sector’s decline real estate will be less pronounced and the savings rate is high, which will limit the damage.
Evolution of the policy rate since 1970
