inflation | The Bank of Canada is expected to raise rates again on Wednesday

(Ottawa) As warnings of a possible recession mount, the Bank of Canada is expected to announce another major rate hike next Wednesday.

Royal Bank of Canada Chief Economist Nathan Janzen expects the Bank of Canada to choose between raising its key interest rate by half a percentage point or three quarters of a percentage point, although RBC is leaning towards a smaller increase.

Wednesday’s announcement would mark the sixth consecutive time the Bank of Canada has raised interest rates this year in response to the highest inflation in decades. It also comes amid growing fears that a recession is looming.

Last week, Finance Minister Chrystia Freeland changed her tune on the economy from her usual praise for Canada’s strong economic recovery in the wake of the COVID-19 pandemic. She warned that tough times are ahead for Canadians. “Mortgage payments will go up. Business is not booming anymore,” she Freeland said. “Our unemployment rate will no longer be at its lowest level. »

In addition to the interest rate decision, the Bank of Canada will publish updated economic projections in its latest quarterly monetary policy report. The central bank’s outlook on inflation will be key to its plans for future rate hikes.

Since last March, the Bank of Canada has raised its key interest rate from 0.25% to 3.25%, resulting in higher borrowing costs for Canadians and businesses.

And while inflation has slowed in recent months thanks to a pullback in gasoline prices, the central bank has made it clear that it doesn’t think its job is done yet.

“Simply put, there is still a long way to go,” Bank of Canada Governor Tiff Macklem said during a speech in Halifax on Oct. 6.

Central bank officials have expressed concern about high inflation and its impact on consumer and business expectations of future inflation.

In September, the annual inflation rate eased slightly to 6.9%, although the bank’s preferred core inflation measures, which tend to be less volatile, were unchanged from August. Grocery prices also continued to rise, with the cost of food rising 11.4% from a year earlier.

However, there is good news for the Bank of Canada on the inflation expectations front. Its recent Business Outlook Survey showed that businesses expect wages and prices to rise more slowly as their headline inflation expectations decline.

The good news, however, will not be enough to deter the bank from another big rate hike, according to Nathan Janzen. “Inflation rates remain too high at this time to prevent further increases in interest rates.”

Most commercial banks expect another rate hike after October before the bank pauses one of its most aggressive rate-hike cycles in history.

The effect of these rate increases should be felt more broadly in the economy next year as Canadians and businesses adjust their spending.

Although there is some division among economists on the severity of the impending economic downturn, many economists believe that the risks of a recession have increased. Recent Bank of Canada surveys show that the majority of Canadians and businesses also believe a recession is coming.

However, many economists have pointed out that Canada’s tight labor market could act as a buffer in the event of an economic downturn. In September, the unemployment rate was 5.2%, which is considered quite low.

Although the Bank of Canada has previously spoken of aiming for a “soft landing,” where inflation falls without triggering a serious economic slowdown, Governor Macklem has said in recent weeks that the bank’s main goal is to restore price stability. The promise has sparked concern among labor groups, who have spoken out against the aggressive course of raising rates out of fear of the potential impact of a recession on jobs.

A new report from the Center for Future Work in conjunction with the Canadian Labor Congress (CLC) calls on the Bank of Canada to postpone rate hikes until it can assess the impact of previous interest rate hikes on the economy. “After three years of coping with the health and economic fallout of an unprecedented pandemic, the last thing Canadians can tolerate is another recession,” says the report by Jim Stanford, an economist and director of the Center for Future Work.

Rather than continue down the path of higher interest rates, Stanford recommends that the Bank of Canada balance its goal of restoring low and stable inflation while promoting economic growth and maintaining jobs.

It also calls on the federal government to take a more active role in fighting inflation by exploring options such as tax increases for high-income earners and windfall taxes for profitable corporations.