The Bank of Canada has not yet given up in its fight against inflation. But its most recent increase of 50 basis points in the key rate, on Wednesday, for a total of 400 points increase since last March, is perhaps the last.
Is the increase of December 7 really the last?
It’s possible. At least that’s what the Bank of Canada suggests in its statement on Wednesday. For the first time since it began to fight against rising prices, the central bank is not announcing further interest rate increases. The phrase “Governing Council expects the policy rate to rise further” from its previous announcement was replaced with “Going forward, the Governing Council will assess whether it is necessary to raise the policy rate further “.
For most economists, this is a significant change in tone that signals the end of interest rate hikes. “In our eyes, there is a good chance that this rate hike will be the last of the Bank,” said Taylor Schleich and Warren Lovely of the National Bank.
Another indicator that goes in the same direction, the Bank of Canada acknowledges that progress is underway on the inflation front. “Price pressures may be easing,” she said.
What will influence the next rate decision?
The Bank of Canada’s next interest rate decision will be announced on January 25th. Until then, two reports on the consumer price index, for December and January, and a portrait of the job market in December will be published by Statistics Canada. These new data will be decisive for the Bank of Canada. Currently, the central bank considers that the inflation rate of 6.9% is still too high, that the economy is still overheating and that the labor market is too tight, with an unemployment rate close to its historic low.
“The short-term evolution of the economy and the consumer price index will determine whether another 25 basis point increase is necessary or not,” explains Sébastien Lavoie, chief economist at Laurentian Bank.
Certainly, according to him, other large increases of 50 basis points are to be ruled out and the probability is low that another increase of 25 basis points will be necessary in January.
With this new increase in rates, is the risk of recession higher?
For Quebec, the answer is yes, according to Desjardins: the decline in the Desjardins Leading Index (DPI) sends a clear signal of a slowdown. “Quebec’s economy will suffer a significant deterioration and the first half of 2023 will be particularly difficult,” said Hélène Bégin, senior economist at Desjardins.
“Almost all the indicators that go into the calculation of the IPD are strongly negative,” specifies Desjardins, which makes him believe in an “imminent” recession.
In Quebec, as in Canada, the economy has not yet absorbed the full shock of the successive increases in interest rates this year. Even though third quarter gross domestic product growth was twice what the Bank of Canada expected and the last quarter of the year is also expected to be better than expected, the worst of the impact of the price hikes rate is yet to come, according to Marc Désormeaux, senior economist at Desjardins.
Mr. Désormeaux expects a more pronounced slowdown than the “virtually stagnant” growth predicted by the Bank of Canada at the start of 2023. The sectors most sensitive to interest rates, such as real estate, are already showing signs of weakness and “it will be even more difficult for these sectors next year”.
What is the impact of the increase in the key rate?
Interest rate hikes are aimed at slowing down an economy that is struggling to supply demand for goods and services and is short of labour, resulting in a general rise in prices. Each increase in the key rate has an immediate impact on all variable rate borrowings such as car loans, personal loans, lines of credit and mortgages. Since Wednesday’s rise, therefore, the cost of these loans has been increased by 50 basis points.
The increase is particularly painful for holders of variable rate mortgages, which have taken increases of 400 basis points since last March.
A homeowner who took out a mortgage loan of $458,000 at a variable rate of 0.9% amortized over 25 years at the beginning of the year therefore saw his monthly payments jump by $933 per month, according to the calculation of ratehub.ca .
During 2021 and part of 2022, variable mortgage rates were much lower than fixed mortgage rates. According to the Bank of Canada, variable rate mortgages currently represent 33% of total mortgage debt in Canada.