Canadians are going to feel the pinch from the Bank of Canada’s largest interest rate hike of the century, but concerns of a recession may be overblown, at least one expert suggests.
On Wednesday, the country’s central bank raised its overnight rate — which influences lending rates for things like mortgages and lines of credit — by a full percentage point to 2.5 per cent. That’s the sharpest surge since 1998 and the fourth rate increase this year from the Bank of Canada, which is trying to combat inflation that’s running at a clip of 7.7 per cent.
“Basically, the hope is to pump the breaks on the economy,” explains Edgard Navarrete, Central 1 Credit Union’s regional economist for Ontario. “People who have debt and people who are borrowers are people who are going to feel it — debt’s going to become more expensive, the ability to borrow is going to become more expensive,” he adds, noting that ideally, inflation would be between 1 and 3 per cent.
By raising its overnight rate, the Bank of Canada hopes to encourage saving over borrowing and spending, thus reducing demand for goods and services and, ultimately, triggering lower prices. If the bank acts with too heavy a hand, though, it runs the risk of causing a recession, with households potentially defaulting on loans and bankruptcies rising.
The main takeaway from Wednesday’s move, says Navarrete, is that the central bank “is serious about fighting the inflation that we’re seeing right now” — and that more hikes are likely on the way. In a news release, the Bank of Canada stated, “interest rates will need to rise further.”
While the housing sector sees immediate impacts from the central bank’s decision — mortgage rates are already rising — investment and the labour market are also expected to take hits. “If the rates are going up, you’re going to be thinking more closely about investments — and that can include expanding your labour force as well,” Navarrete notes.
Although an increase to the overnight rate was widely expected, the size of Wednesday’s hike took many by surprise, including Navarrete.
Nonetheless, the Canadian economy should be able to weather the storm.
“The recession risk is not zero, but it’s not as high as a lot of people are scared of at the moment,” Navarrete says. He says the country’s labour market, although due to face headwinds, remains tight and that some challenges, like supply-chain disruptions, are lingering effects from the pandemic rather than signs of fundamental issues. Being resource rich, Canada is also insulated from some impacts of the war in Ukraine, a major exporter of wheat.
If there is a recession, Navarrete doesn’t think it will be anything like the Great Recession between 2007 and 2009. “Even if it comes, I do feel it might be a mild recession,” he says. “It might be technical recession — a slowdown for two consecutive quarters — but I think the economy can probably come out of that fairly quickly.”
The Bank of Canada’s next interest rate announcement is scheduled for September 7.
