Additional Interest Rate HikesBank of Canada Governor Tiff Macklem said that the central bank’s aggressive interest rate policy is working at bringing down inflation. After raising its key lending rate 10 times since the start of 2022, from 0.25% to 5.0%, Canada’s inflation rate has retraced from a 39-year high of 8.1% in June 2022 to 4.0% today.

That’s still far below its target rate of 2%. The Bank of Canada now says annual inflation won’t return to that target rate of 2% until mid-2025.

Despite the big drop in inflation, the Bank of Canada has not ruled out additional rate hikes, with Macklem saying “the fight against inflation is not over. We’re not seeing downward momentum in underlying inflation, and that is a concern.”

As a result, Canadians should expect more volatility. And that volatility is not confined to Canada’s borders. There are growing concerns that geopolitical tensions in Israel could spread across the entire Middle East and threaten the global economy.

This could result in more rate hikes. At least that’s what Bay Street analysts are predicting when the Bank of Canada meets next on October 25.

Will another rate hike push Canadian households to the brink and kick the economy into a recession? No. In fact, Macklem said that “We’re not expecting a recession in Canada.”

How Is the Stock Market Responding?

Tiff Macklem might believe the Canadian economy will avoid a recession, but the stock market is saying something else.

Since the beginning of July, the TSX, Canada’s largest stock market, has pretty much erased all of the gains it made in the first six months of the year. It’s up just 0.5% year-to-date. In the U.S., the blue-chip Dow Industrial Average is up just 1.6% year-to-date.

Weak stock market performance in 2023 goes counter to what the economic data is telling us.

Canadian and American gross domestic product (GDP) has been resilient. The Canadian economy contracted in the second quarter but was flat in July with preliminary data suggesting it expanded in August. In September, Canadian employers also added 64,000 jobs.

In the U.S., the St. Louis Federal Reserve increased its third quarter GDP forecast to 1.93% from 1.6%.

Why are the financial markets sounding the alarm?

Together, Canadian household, corporate, and government debt is now four times the size of the entire Canadian economy. It’s not just the highest debt loads we’ve ever had to deal with, its also among the highest debt levels in the world. And a lot of that debt was taken on when interest rates were at record lows.

Admittedly, the stock market and economic data are not the same thing. Investors may be nervous but the Canadian economy looks like it has enough steam to get us through this rocky period. So much so that, as Tiff Macklem says, we may not even enter a recession, or if we do, the Canadian economy will stick a soft landing.

The economy may be throwing off contradictory numbers, but the “real economy,” that is GDP, jobs, and inflation numbers, show the Canadian economy is doing better than expected and, it seems, than most investors think. The upside, if this is true, is that there are many Canadian and American stocks trading in bargain territory., Canada’s Leader in Stock Market Trading Courses

The Bank of Canada’s interest rate policy is working at cooling the Canadian economy and taming inflation. While the central bank has said the Canadian economy will avoid a recession, the financial markets aren’t in agreement. When it comes to investing, does it even matter if Canada or the U.S. enters a recession or not. Ask the trading experts at is Canada’s oldest and leading provider of stock market trading courses. Over the years, we’ve taught tens of thousands of Canadians, of every skill level, how to trade more confident and profit more consistently. We also provide a unique, Lifetime Membership that allows you to re-attend any part of the program as often as you’d like.

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