OTTAWA—As widely expected, the Bank of Canada raised its key rate by 75 basis points (0.75 percent) to 3.25 percent on Sept. 7 to continue dampening demand to fight inflation. Additionally, it signalled that more rate hikes are coming, which is leading some economists to forecast an impending recession and not the “soft landing” the central bank projected in July.
“The issue about whether it can pull off a soft landing, I think that issue is secondary now,” Jean-Paul Lam, economics professor at the University of Waterloo and former BoC assistant chief economist, told The Epoch Times.
He added that the BoC is not being explicit about causing “some pain” to businesses and households like U.S. Federal Reserve chair Jerome Powell did in his speech at Jackson Hole in late August.
“It is basically language that they would, come hell or high water, get inflation down to 2 percent even if that caused a lot of pain to people,” Lam said about the Bank of Canada statement.
This is the highest the central bank’s policy rate has been since April 2008, when it was 3.5 percent, just prior to the onset of the financial crisis.
The Bank of Canada previously said the neutral range for its overnight rate target–where the economy is neither being stimulated nor dampened–was estimated to be between 2 and 3 percent. At 3.25 percent, the interest rate is now in restrictive territory and will act to cool down the economy and inflation.
“The Governing Council still judges that the policy interest rate will need to rise further,” said the central bank in its official statement.
“We will be assessing how much higher interest rates need to go to return inflation to target.”
RBC senior economist Josh Nye said he expects a “mild recession in 2023,” while Tony Stillo, director of Canada Economics at Oxford Economics, said, “In our view, Canada is now likely to fall into a moderate recession by late 2022.”
Analysis is divided on whether the BoC hikes by another 25 basis points or 50 basis points in October.
Lam said that the BoC is not going to stop hiking rates until core inflation and short-term inflation expectations start coming down, but that he thinks we’re not very far from the end of rate increases.
Misleading Peak
Bank of Canada governor Tiff Macklem, in an Aug. 16 National Post editorial, said he believes inflation may have peaked. July inflation came in at 7.6 percent—down from June’s reading of 8.1 percent. However, the BoC’s three core measures of inflation have not peaked, and their average rose to above 5 percent in July.
The BoC attributed the small drop in inflation to gasoline prices but countered this development with the fact that “data indicate a further broadening of price pressures, particularly in services.”
