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Economists expect one last BoC rate hike as possible recession looms

The Bank of Canada is set to announce another interest rate hike on Wednesday, and economists are hoping it will be the last for some time, with some warnings it could be a step closer to recession as Canada tries to recover. balancing the need to fight inflation with growing pressure on the housing market.

Economists and most commercial banks are anticipating a quarter-percentage-point hike on Wednesday, which would take the central bank’s key rate to 4.5%.

If a rate hike is announced, it will be the eighth time the interest rate has been raised in the last 10 months.

“Now the question is whether this is the last,” Jimmy Jean, vice president and chief economist at Desjardins, told CTV News Channel on Tuesday.

“Certainly the case is building now that we have tightened enough. We saw a spike in inflation, we can’t say the signs are too convincing that the trend is accelerating, but at least we saw a spike. And we know that the economy, especially interest rate sensitive sectors, is slowing down.

After peaking at 8.1% over the summer, the annual inflation rate fell to 6.3% in December, a sign that the Bank of Canada’s interest rate hikes could bear fruit in the fight against inflation.

But it’s a tricky business, and some economists say an eighth rate hike is dangerous and could push Canada closer to a recession. Jim Stanford, chief economist at the Center for Future Work, wrote in a blog post on Monday that the Canadian economy has not recovered from the hit of the pandemic, noting that retail sales are down and the GDP growth is not high enough.

A research note released Monday by the National Bank of Canada by economists Matthieu Arseneau and Taylor Schleich said “the most aggressive policy rate hike in a generation is having an impact on the economy.”

The new increase in interest rates expected on Wednesday is 25 basis points, less pronounced than the 50 basis point increase observed in December. But even a small hike can have huge impacts, say economists.

“Those who argue that another 25 basis point hike won’t kill the economy are forgetting that at this point in the business cycle, the impact of further hikes is not linear,” the research note said. the National Bank. “In other words, the marginal increase could be the straw that breaks the camel’s back.”

If the central bank doesn’t want to lose credibility, it would be wise to make this the last rate hike for a while, Jean suggested, as interest hikes have caused instability for some Canadians, especially in the housing market.

“When you look at metrics like debt-to-income or debt-to-asset ratio, it’s very high, and secondly, we also have a feature in our mortgage system that, for example, the US doesn’t have” , said John. “We typically renew a mortgage every five years, so people renewing now are doing (this) at much higher interest rates, and given the debt burden that puts a significant strain on their budget.”

Those caught up in the need to renew a mortgage at a time when interest rates are higher may find their budget constrained. It’s a question that could domino depending on how strong other aspects of the economy are.

According to the Center for Future Work, additional debt burdens paid by households increased by 0.6% of GDP in the third quarter of 2022, the largest quarterly increase in history.

The National Bank research note said Canadian housing “is in a recession”, adding that “cumulative price declines (are) now exceeding what was seen in 2008-2009”.

Jean said the job market is still “tight, resilient, but that doesn’t mean it’s going to last forever.”

“If we go into an environment in 2023 where people start losing their jobs and we still have these big increases in mortgage payments, that will put a lot of people in financial trouble,” he said. “They’re going to stop spending, as we should see contractions in GDP, and if the Bank of Canada really pushes too far, it could create a recession of a magnitude that doesn’t really need to be managed. inflation.”

If the Bank of Canada fails to make this interest rate hike its last for now, it could be difficult for anyone to argue that the pros outweigh the cons, he said.

“Especially knowing that some of the inflation that was transitory – supply chains, those kind of pressures, energy – those are going down nicely right now, so I think there are good arguments to do so…after this one, the Bank of Canada might want to stop,” Jean said.

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