interest rate | Experts expect another big migration

(Ottawa) Inflation appears to have peaked in the country, but it remains very high and the Bank of Canada is widely expected to make another significant rate hike next week.

Posted at 4:52pm

Nojoud Al Mallees
The Canadian Press

However, some economists believe Wednesday’s surge could be the last for a while.

“We think we could be in a comfortable enough position by October for the bank to pause and examine how the economy is responding,” said Karyne Charbonneau, CIBC’s managing director of economics.

The central bank’s interest rate decision in September comes at a crucial time for Canada’s economy.

Due to the fall in gas prices, annual inflation was 7.6% in July, down from 8.1% in June. Gross domestic product (GDP) rose in the second quarter from the first three months of the year, although the pace of growth slowed towards the end of the period and a preliminary estimate for July points to a slowdown. Meanwhile, the unemployment rate remains at a historically low level.

Despite easing inflation, Bank of Canada Governor Tiff Macklem said in an Aug. 16 comment that high inflation, which is nearing a 40-year high, remains a concern.

Inflation has come down a bit in Canada, but it’s still way too high. We know we still have a lot to do. We will not give up until we bring inflation back to the 2% target.

Tiff Macklem, Governor of the Bank of Canada

Some of Canada’s big banks are expecting the central bank to hike interest rates by three-quarters of a percentage point to 3.25% on Wednesday.

In a well-attended speech last week, Federal Reserve Chair Jerome Powell sent a clear message on his own rate-hike cycle, saying the Fed is likely to impose larger rate hikes in the coming months. His warning that the US Federal Reserve will remain aggressive on interest rates has some observers wondering whether the Bank of Canada’s Sept. 7 hike could be a full percentage point.

The impact on indebted households

The bank raised its policy rate by a full percentage point in July – the largest single hike since August 1998 – continuing a series of rate hikes that began in March. It had spent the past two years at 0.25%, the level the bank cut it to at the start of the pandemic.

Higher interest rates are driving up the cost of borrowing across the economy, for Canadians and businesses. The central bank hopes that by raising the cost of debt, spending in the economy will slow and inflation will fall.

However, economist David Macdonald of the Canadian Center for Policy Alternatives warns that the rapid pace of increases due to high levels of corporate and household debt could have a serious impact on the economy.

In his most recent analysis, Mr Macdonald pointed out that private sector debt accounts for 225% of the country’s gross domestic product. For comparison, the last time the bank raised interest rates so quickly was in 1995, when private sector debt was 142% of GDP.

That higher debt level, he says, will make it harder to achieve the bank’s desired “soft landing,” where rate hikes lower inflation without triggering a recession.

“What I really wanted to emphasize in this analysis is the fact that private sector debt is much higher today than it was in the 1980s (and) 1990s and the periods of earlier years where we saw this type of rapid increase have,” McDonald said. And that’s important, of course, because it’s not just the interest rate that matters. The interest rate is charged on something. It is settled on private sector debt. »

Any solutions from the government?

Mr Macdonald called for alternative solutions to calm inflation that would come from the federal government rather than central bank policy.

Some of his recommendations include changing mortgage underwriting rules for investors, lowering house prices and extending the new corporate tax to excess profits beyond financial institutions.

However, Christopher Ragan of McGill University’s Max Bell School of Public Policy argued that the central bank is best placed to shoulder the responsibility for keeping interest rates low.

“There are very, very good reasons why we have an operationally independent central bank trying to fight inflation and not governments, because governments have done a very bad job on this in the past,” he said.

Mr Ragan asserted that the Bank of Canada’s independence allows it to act decisively in the face of inflation, while any government intervention would be highly political. Still, the expert concedes that trying to lower inflation with rate hikes is painful.

“That’s actually why it’s so important never to let inflation skyrocket,” Ragan said. Because not only is high inflation bad, but reducing high inflation to low inflation is very bad. »

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