Bank of Canada expected to raise interest rates for fifth time
Some of Canada's major banks are forecasting the central bank will the key interest rate by three-quarters of a percentage point, bringing it to 3.25 per cent.
Inflation appears to have peaked but it’s still running hot and a supersized rate hike from the Bank of Canada next week is widely expected.
Some economists think Sep. 7’s hike could be the last for a while.
“We think that by the time October comes around, we might be in a good enough position for the bank to take a pause and look at how the economy is reacting,” said Karyne Charbonneau, CIBC’s executive director of economics.
The September rate call comes at a crucial time for Canada’s economy.
As gas prices fell, the year-over-year inflation rate sat at 7.6 per cent in July, down from 8.1 per cent in June. Second-quarter GDP grew compared with the first three months of the year, though that slowed toward the end of the period and a preliminary estimate suggests a contraction in July. Meanwhile, the unemployment rate is holding at a historic low.
Despite the drop in the inflation rate, Bank of Canada Governor Tiff Macklem said in an Aug. 16 op-ed that nearly 40-year high inflation was still a major concern.
“Inflation in Canada has come down a little, but it remains far too high,” Macklem wrote. “We know our job is not done yet — it won’t be done until inflation gets back to the two per cent target.”
Some of Canada’s major banks are forecasting the central bank will the key interest rate by three-quarters of a percentage point, bringing it to 3.25 per cent.
Higher interest rates feed into higher lending rates across the economy, making it more expensive for Canadians and businesses to borrow money. The central bank is hoping that by making the cost of debt more expensive, spending in the economy will slow and inflation will cool.
However, senior economist David Macdonald at the Canadian Centre for Policy Alternatives warns the rapid pace of the hikes could have serious repercussions because of the high level of business and household debt in the economy.
Macdonald has been calling for alternative solutions to cool inflation using federal government rather than central bank policy.
Some of his recommendations include changing mortgage underwriting rules for investors to cool housing prices and expanding the new excess corporate profits tax beyond financial institutions.
