The Days Of Relentless Rate Hikes By Bank Of Canada May Be About To Draw To A Close

On Wednesday, the Bank of Canada unveils its latest interest rate policy. Many expect the Governor of the Bank of Canada, Tiff Macklem, to deliver on his promise to hold off on interest rate hikes.

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Interest rates

It's been almost exactly a year since the Bank of Canada began aggressively raising its key overnight lending rate. Since then, Canadian households have struggled with ever-increasing debt payments. Borrowing costs have increased by a staggering 425 basis points in the last 12 months.

GDP is slowing, inflation is slowing, and wage growth is moderate. However, economists agree that it is enough to convince the Bank of Canada to catch up and finally give some respite to households struggling with rising debt payments and looming mortgage renewals.

The Bank of Canada will keep its key interest rate unchanged at 4.50% until the end of the year

Taking a decision on interest rates next week, both Charbonneau and Janzen believe the Bank of Canada has done enough to warrant a pause in interest rate hikes.

However, the central bank was in a very different place last March, facing heavy criticism for taking too long to contain rising inflation.

Inflation

The consumer price index has fluctuated between one and two percent for most of the last few decades. As the effects of the COVID-19 pandemic began to perpetuate, inflation began to pick up.

The most recent inflation data suggests the country is inching closer to normal price growth. Canada’s annual inflation rate slowed to 5.9 per cent in January, down from the peak of 8.1 per cent reached in the summer.

GDP

Statistics Canada's latest GDP report shows that the Canadian economy tumbled into the fourth quarter with zero growth, but under the disappointing figures was resilient consumer spending keeping the economy afloat.

While that report showed a much bleaker economy than forecasters had expected, the federal agency's preliminary estimates showed the economy rebounded in January with a 0.3 percent increase.

The GDP figures simply "confirm" that the Bank of Canada will not raise interest rates when it announces its decision on Wednesday.

Labour Market

Canadian employers added 150,000 jobs in January. This is about 10 times more than economists expected.

Economists agree that another 5,000 jobs will be added on Friday after the February data is released.

Wages have never increased as much as prices. So workers have actually lost purchasing power over the past two years. Statistics Canada said wage growth peaked last November at 5.6 percent.

And while a strong labor market is good news for workers, Bank of Canada Governor Tiff Macklem has repeatedly said that a tight labor market is a symptom of an overheating economy that fuels inflation.

If demand weakens, companies struggling with lower sales are likely to change their hiring plans, causing unemployment to rise.

Source: ivnesting.com