On Wednesday, the Bank of Canada announced an eighth consecutive interest rate hike, rising to 4.5% from 4.25%, the highest rate in 15 years. Why bounce back when inflation is losing ground? Can we expect falling prices and interest rates? To find out, we put all our questions to an economist.
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Why was the key interest rate raised for the 8th time since March 2022?
Everything costs more, both services and consumer goods. Inflation reduces your purchasing power if your income doesn’t grow fast enough. So why is our central bank raising interest rates again?
“We hit an inflation rate of 8% a few months ago. Today we are at about 6%. The problem is that it was very easy to go from 8% to 6%, but now it’s sticky. It’s not falling fast enough,” explains Jules Boudreau, economist at Mackenzie Investments.
This can be explained, among other things, by the context of full employment. Inflation tends to rise when unemployment is low and tends to fall when unemployment is high. “Labor markets remain tight: the unemployment rate is near historic lows and companies say they continue to struggle to find staff,” the bank’s statement said.
It’s not rocket science: the higher the employment, the more people consume and the more demand for goods and services is stimulated. On the other hand, this demand must fall for inflation to slow down.
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When could the target inflation rate be reached?
The Bank of Canada’s sole mandate is to keep inflation around the target rate of 2%. That is why it has been increasing the base rate every two months since March 2022 in order to achieve this goal.
For its part, the central bank states that “spending on consumer services and business investment should fall as the impact of rate hikes continues to resonate in the economy.”
It is this slowdown in the economy that should allow supply to catch up with demand and thus meet the 2% inflation target. According to the Bank of Canada, inflation as measured by the consumer price index should “level off at around 3% mid-year and return to the 2% target in 2024”.
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Will prices ever go down again?
no At least not if there is no major recession in 2023, says economist Jules Boudreau.
“Prices themselves will not go down. You hit a plateau. On the other hand, inflation, which is the origin of price growth, is about to fall,” he nuances.
Deflation, ie the counter-phenomenon of inflation, is therefore not in sight.
The expression “what goes up comes down eventually” may apply to interest rates, but not to consumer prices, which are implanted in the economy for Well.
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When will we see interest rates drop?
Not before the end of 2023, the economist estimates.
“Several economists believe there will be a tipping point very soon and that floating rates will return to around 3% within six months, but we [Placements Mackenzie], we don’t believe it. We believe rates will stay above 4% through 2023,” says Jules Boudreau.
For first-time buyers, this is a particularly painful situation. Real estate prices started falling in late 2022, but interest rates remain very high, making real estate difficult to access.
Still, the economist suggests that buyers may prefer a fixed rate to a floating rate as interest rate hikes are ongoing.
“Prices will rise again today and maybe in the future. It is still beneficial to secure a rate for the next few months.”
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What can you do with your investments?
Although the ups and downs of the stock markets have put investors in uncomfortable situations for several months, those who invest for the long term, ie with a horizon of more than 5 years, have lost nothing.
“For young investors, this is a unique opportunity to take risks,” says Jules Boudreau. I don’t think it’s a good idea to exit the markets now as strong returns are expected going forward.”
Can we expect further rate hikes?
Yes. It would not be surprising if the central bank proceeded with a ninth straight rate hike on March 8th.
“The worst of inflation is behind us, but reaching a target rate of 2% takes work and will not happen overnight.”