The Bank of Canada has been aggressively raising interest rates to cool the economy and stave off a recession. Since March 2022, it has increased its key lending rate 10 times, from 0.25% in March 2022 to a 22-year high of 5.00% in July 2022. It looks like the interest rate hikes are working, and after some weak economic data, it appears as though the Bank of Canada could be hitting pause for this rate cycle.
How Is the Canadian Economy Doing?
Canada’s economy unexpectedly lost 6,400 jobs in July as the unemployment rate climbed to 5.5%, which is the third straight monthly increase. Economists were expecting the Canadian economy to add 25,000 jobs. The increase in the unemployment rate was expected.
The unexpected job losses come after a surprise gain of 59,900 jobs in June, which came on the heels of 17,300 job losses in May. This see-saw suggests the Canadian economy is starting to feel the effects of the 475 basis points of rate hikes from the Bank of Canada since early last year.
This slow winddown of the economy is in keeping with historical economic data that shows the effects of interest rate hikes can sometimes take a year or 18 months to play out.
Economists believe that the big job losses in July mean the Bank of Canada could be done with interest rate hikes in this economic cycle. The Bank of Canada meets next on Wednesday, September 6.
Will the Bank of Canada Pause Interest Rate Hikes?
There is a caveat though. The central bank has said rate hikes, pauses, and cuts would be data-driven. The unexpected job losses in July suggest rate hikes could come to an end. But, if Canada’s next gross domestic product (GDP) reading comes in hotter than expected, the central bank could raise rates again. It looks unlikely, though.
The Canadian economy has been losing steam. After increasing 3.1% in the first quarter, second quarter GDP is expected to have cooled significantly. The economy did grow in April and May but at a much slower pace.
Statistics Canada expects the economy to contract 0.2% in June. The bearish sentiment is justified since manufacturing, retail, and wholesale sales fell by 1%, 0.2%, and 3.7% respectively in June. Overall, second quarter GDP is projected to be at around one percent.
A pause in the Bank of Canada’s interest rate hikes would be a relief for both the stock market and Canadians. The latest Consumer Price Index report showed inflation inched up to 3.3% in July, from 2.8% in June; moving further away from the Bank of Canada’s target of 2.0%.
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Related: Bank of Canada Holds Interest Rate at 5% as Economy and Corporate Earnings Slow
