The Bank of Canada is scheduled to make its next rate announcement on September 7. Bay Street and Main Street are anxious to see what the central bank does in an effort to tame inflation, which is at a four-decades high of around eight percent.
CIBC, one of the country’s biggest banks, said it expects the next rate hike will be the last of the central banks most aggressive interest-rate hike cycle ever. Economists at CIBC expect the Bank of Canada to raise its key lending rate an additional 75 basis points, bringing the overnight target rate to 3.25%. And then leave it there throughout 2023. Others are not so sure and believe the Bank of Canada will raise its rates one more time in 2022 to 3.75%.
Either way, the big rate hikes will have a restrictive impact on the Canadian economy. Given the negative effect inflation is having on the economy and upside risks for additional price growth, the central bank needs to raise rates to the point where they act as a drag on Canadian economic growth.
The Bank of Canada has been hiking its rate at a torrid pace this year. In March, it raised its overnight interest rate to 0.5% from a record low 0.25%. In April, it raised interest rates by 50 basis points and in June raised it again to 1.5%. The central bank announced a supersized 100 basis point increase in July to 2.5%.
The Bank of Canada actually has a mandate that requires it to keep inflation within a control range of one percent to three percent, with an inflation target of two percent. Annual inflation has exceeded the upper band of that range for 16 consecutive months…and counting.
Will Big Rate Hikes Lead to a Recession?
A study by the Canadian Centre for Policy Alternatives indicates that rapidly increasing interest rates will likely trigger a recession. The Bank of Canada has a zero-success rate of fighting inflation by quickly raises its key lending rate. Each time it’s done this over the last 60 years, it’s led to a recession.
Rising interest rates are having a big impact on the way Canadians spend, with four in five saying they have cut their spending over recent months, either by reducing their discretionary budget, delaying major purchases, driving less, or taking on debt to cover expenses. Canadian banks generally charge a two percent premium over what the Bank of Canada’s key lending rate is for prime lenders.
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The Bank of Canada is rapidly raising its key lending rate to tame runaway inflation but rising interest rates are negatively impacting the way we save and spend. Investors may be hoping that the Bank of Canada will reverse its hike in early 2023, but its hawkish tone suggest rates will rise and stay high for longer than investors want. And that is putting pressure on equities.
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