In this time of great financial stress from inflation and rising interest rates, the coming months will be even more difficult. The risk of falling into a recession is increasing.
Why ? The Bank of Canada will have to keep raising interest rates simply to follow in the footsteps of the US Federal Reserve (Fed), which is determined to give inflation another solid boost.
On Wednesday, the Fed raised interest rates by three-quarters of a percentage point to a range of 3% to 3.25%. But following that announcement, Fed Chair Jerome Powel made it clear that more major rate hikes are on the way. The Fed’s ultimate goal is to bring inflation down to just 2% by 2025, down from around 8% last time.
According to their forecasts, the Fed’s key interest rate is set to rise by a further 1.25 percentage points by the end of the year. This will push the Fed interest rate to at least 4.4%.
Bank of Canada
If the Bank of Canada follows the Fed, that means our Canadian interest rate could potentially rise another 1.25 percentage points to 4.5%.
If this is the case, it means that Canadian borrowers would face another significant interest rate hike (roughly +1.25%) on mortgages, personal loans, car loans, business loans and so on.
Question: What would happen if the Bank of Canada decided to ignore the Fed’s upcoming rate hikes?
The Canadian dollar is weakening
One thing is for sure, the Canadian dollar could take another hit. At the beginning of the current year, the Canadian dollar was quoted at 80 US cents. Today it is just above the 74 US cent mark. It has thus lost 7.5% of its value in the last few quarters.
If the US Federal Reserve continues to hike interest rates by another 1.25 percentage points and the Bank of Canada does not, there is no doubt that the Canadian dollar’s fall could deepen.
And then worse? Since we import many goods from the United States, the weaker the Canadian dollar is compared to the American currency, the more expensive the products imported from our main trading partner will be. This affects our wallet.
In 2021, the value of products imported by Canada from the United States was nearly $300 billion.
The American Challenge
With the interest rate hike to 3.25%, the US Federal Reserve expects a significant slowdown in growth in the US economy by the end of the year. She speaks of growth of almost 0.2% of real GDP. That growth would increase to around 1.3% by 2023.
With its credit crunch, the Fed wants the unemployment rate in the United States to rise from 3.7% (currently) to at least 4.4% in 2023.
This is significantly lower than the 9.3% unemployment rate that was in full swing during the 2008-2009 recession.
The chances that the United States will slide into recession because of the spectacular rise in interest rates are high. But if that should happen, we’re talking about a “mild” recession.
The same applies to Canada and its main provinces, including Quebec and Ontario.
A piece of advice: this is not the time to get into crazy spending!
