The Bank of Canada is set to announce another major rate hike on Wednesday to bring down soaring inflation amid growing criticism the central bank’s aggressive rate hikes will cause a painful and unnecessary recession.
Economists forecast the Bank of Canada will hike the overnight lending rate by three-quarters of a percentage point bringing the rate to four per cent from the current 3.25 per cent. Wednesday’s rate hike will be the sixth this year, after the central bank kept the overnight rate at a historic low of 0.25 per cent during the pandemic until March 2022.
Jim Stanford, an economist and director of the Centre for Future Work, said a recession is likely if the Bank of Canada continues to move forcefully on interest rates, because if history is any guide, it happens every time the central bank moves rates too quickly. Bank of Canada governor Tiff Macklem said the main goal is to curb soaring inflation, which reached a high of 8.1 per cent in June before dropping to 6.9 per cent in September — far from the Bank’s two per cent inflation target.
“The Bank convinces Canadians that they will likely cause a recession if they don’t get spending down and it creates this psychological effect where Canadians think they’re becoming less wealthy so they decide to spend less,” Macdonald said, adding it creates collateral damage for the economy in terms of job cuts.
Spending on necessities such as food, energy, and shelter has increased drastically during the pandemic and it’s impacting households with less income, he said. If that continues, the wealth gap will only widen. While increasing wages can help, if inflation keeps rising for a prolonged period of time, wage increases won’t save households from the higher cost of living. Especially as workplaces also tighten the purse strings.