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Bank Of Canada’s Rapid Rate Increase Could Push Economy Into Recession

Economists caution that the Bank of Canada’s aggressive rate increase risks pushing the economy into a recession and costing thousands of jobs.

The Central Bank attempted to control inflation by increasing its key lending rate to 3.25 per cent on Wednesday, its fifth increase this year, despite early indications that the economy is shrinking.

After the Bank of Canada increased its benchmark overnight lending rate for the fifth time this year, economists warned that the Bank posed the risk of plunging the Canadian economy into recession and sacrificing hundreds of thousands of jobs.

To combat inflation, the Bank of Canada increased its rate by three-quarters of a percentage point on Wednesday morning to 3.25 per cent. Additional increases are expected in the future.

The Governing Council believes that a further increase in the policy interest rate is necessary given the inflation outlook. Furthermore, the Bank stated in its announcement of the rise that quantitative tightening complements the policy rate increases. As a result, the Governing Council will continue to act as necessary to attain the two percent inflation target.

David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, referred to the two percent target as “arbitrary” and claimed that the Bank’s harsh tone makes its objective clear: to control inflation at any cost.

Macdonald says, “It starts to dispense with the idea of a soft landing, and moves more toward the idea that we’ll reach the two per cent goal, whether there’s a recession or not, whether there are job losses or not.”

Macdonald estimates that if the Bank maintains its two percent inflation target, up to 850,000 people could lose their jobs in a recession.

The head economist of BMO, Douglas Porter, agreed that a recession is possible. However, surprised by the Bank’s tone in the announcement, he said there was an obvious risk in this and cautioned against going overboard.

“A lot of people thought that maybe this would be the last rise. This statement certainly puts an end to that thinking,” said Porter.

Porter predicts that the Bank will raise rates by another half of a percentage point by the end of the year, but he also hinted that three-quarters of a percentage point increase also remains possible.

According to Statistics Canada data, the basket of products used to calculate the Consumer Price Index indicated prices were 7.6% higher in July than they were a year earlier. But, again, that represents a modest decline from June’s 8.1 per cent year-over-year growth.

By increasing the overnight rate by one percentage point, to 2.5 percent, in July, the Bank surprised observers. The overnight rate was 0.25 per cent at the start of the year, where it had been since the Bank of Canada reduced it three times in one month in March 2020, when the global COVID-19 pandemic was announced.

The Bank’s core measures of inflation continued to increase in July, ranging from 5% to 5.5%. According to surveys, predictions for short-term inflation are still strong. The likelihood of persistently high inflation increases the longer this goes on, the Bank added.

The increase follows preliminary data showing a modest decline in Canada’s economy in July. According to preliminary figures released by Statistics Canada, the real gross domestic product decreased by 0.1% in July compared to June.

Presented by CTC News