Economists have predicted that the Bank of Canada (BoC) will continue to tighten its monetary policy as the latest inflation data showed no signs of a slowdown. Statistics Canada revealed a September year-to-year consumer price index (CPI) of 6.9 percent, exceeding an earlier prediction of 6.7 percent.
Toronto-Dominion Bank managing director Leslie Preston said the policy rate increase had begun to impact the economy. She said the recent inflation data stressed the need to increase the central bank's overnight rate by 50 basis points next week.
“We expect the bank is getting closer to a pause on rate hikes, once it reaches four per cent by the end of the year,” Preston added.
Other economists, on the other hand, predicted that the rate hike would go up to 75 basis points. Bank of Montreal economist Douglas Porter explained the Canadian dollar’s weakness and the U.S. Federal Reserve’s likelihood to increase the interest rates by three-quarters of a percentage point would influence BoC to do more significant tightening.
BoC is expected to do another hike later in December. CIBC economist Karyne Charbonneau said that if the central bank set the increase at 75 basis points next week, it would only increase the rate by 25 basis points in December with support from economic growth numbers.
Like the U.S., Canada aims to lower its inflation rate to two percent. The country’s inflation peaked last June at 8.1 percent. In September, inflation data showed slightly improved core price pressures. Housing prices in September were also down 21.6 percent from February.
Recession looming over Canada
Public fear of a recession has increased in Canada due to its central bank’s policy and a projected “technical recession” within the first six months of 2023. Scotiabank head economist Jean-Francois Perrault explained that the global economic situation further amplified the fear.
“You’ve got the pretty horrible situation in Europe,” Perrault said. “Obviously, China is going through a very significant slowdown — perhaps so significant that they decided yesterday not to publish economic data for a little while.
“And we got the U.S. where things are slowing and the Feds indicated that they want to raise interest rates quite a bit more and that will lead to a recession there.”
Despite that, Perrault said that a number of sectors in the country remained resilient. He added that the BoC was aiming to “engineer” an economic slowdown. However, Another economist at Scotiabank, Derek Holt, said that the central bank might be looking to enter a recession to bring inflation under control.
"They will never say it but I think they're perfectly willing to court recession in the backs of their minds," Holt said. "I think they are open to it as a necessary evil to combating inflation."
TD Securities strategist Andrew Kelvin did not think BoC “necessarily” aimed for a recession. He argued that the central bank wanted to restore its credibility and tame inflation, but a recession was the probable cost to reach those objectives.
Last week, BoC governor Tiff Macklem insisted that the central bank could continue its aggressive combat against inflation without causing a recession. He said the country would still see economic growth, albeit at a modest rate.
The country needs two consecutive quarters of declining economic growth to enter a technical recession. Macklem warned that the risk of a recession would be higher if the U.S. dollar maintained its strong position.