The Bank of Canada will raise interest rates on December 7th. Governor Macklem said he would guarantee it.
He told the House finance committee that the phase would end. We are not there yet.
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Macklem didn't give away anything. No one knows if he is leaning towards another outsized increase or if he is going to start pumping the brakes more gently and return to the central bank's preferred rate of quarter-century.
Bay Street and Wall Street have differing opinions on whether Macklem will raise the benchmark rate by a quarter of a percentage point or half of a percentage point. At 10 a.m., the answer comes. The time in Canada's capital is on December 7th. Here are the things you need to know.
Since April 2021, the consumer price index has been increasing at an annual rate of more than three per cent, peaking at a dangerously fast rate of 8.1 per cent in June.
Macklem and his coworkers were surprised. They thought that the burst of inflation in 2021 was caused by supply backlogs that built up during the Pandemic, and that prices would go down once things got back to normal. That didn't happen. The easing of health restrictions unleashed a wave of demand by households that had been forced to save for a long time.
The Bank of Canada has been working hard. Macklem started with a half-point increase in March, followed by a full percentage point in July, three quarters of a point in September, and a half-point in October.
After more than a decade of low interest rates, the target is at it's highest setting since 2008. It was too high for policymakers to keep annual increases in the consumer price index under 2% in September and October.
Macklem said that the economy is in excess demand. "It's too hot."
The Bank of Canada, along with the United States Federal Reserve and all the other central banks that are raising borrowing costs aggressively, are about to run the economy off the road, according to some economists. Sébastien Mc Mahon, an economist at Industrial Alliance Insurance and Financial Services Inc., said in a video to his clients that there are conditions that are close to recession.
The change in borrowing costs will affect consumer psychology since central banks kept interest rates low. There was an increase in the household savings rate. The Great Recession was as bad as it was because American households with high levels of debt retreated when financial conditions improved. Canadians are as indebted as their American cousins were. Bank of Canada research shows that half of variable-rate mortgage payments are only covering the interest, which is a potential anchor on consumer demand.
When the Bank of Canada lowered interest rates to fight the recession, housing investment went up. The economy has been powered by housing since 2010. With the United States and Europe also on the verge of a recession, business investment and exports will need to pick up the slack.
The central bank's assault on inflation is working as domestic demand is the only source of price pressures over which policymakers have any control. When the main cause of inflation is commodity prices and supply issues, it would be pointless to do more to snuff out domestic demand.
The economy can't take a lot more of this.
Charles St-Arnaud, a former Bank of Canada economist, re-upped his bet that Macklem would reduce his interest rate increases next week after reading the GDP report. He advised his clients that the Bank of Canada would be hiking borrowing cost by half a point on December 7 after studying Statistics Canada's Labour Force Survey.
The unemployment rate dropped to 5.1 per cent in November, after employers created more than 100,000 jobs in a single month, and the average hourly wage increased for the year.
St-Arnaud said that the Bank of Canada needed to slow growth and create excess capacity to fight inflation. The unemployment rate will likely go up and job losses will occur. The BoC would be happy if the labour market weakened.
The head of Canada's biggest private sector union said last month that the pace of wage increases would be of concern to Macklem, not because he is waging a " class war", but because expectations are key to the way central bankers think about inflation. Workers and suppliers will demand compensation if they think prices will go up next year. Macklem wants to stop them before they get entrenched. He has raised interest rates so much. His job will be harder if he can't convince the public that the inflation is going back to two per cent.
Canada's latest GDP numbers show that higher borrowing costs are starting to bite, but they also show that the economy still grew at a faster rate than the Bank of Canada predicted. Macklem has made it clear that he is more concerned about inflation getting out of hand than he is about a mild recession. The central bank predicts that growth will stall over the last few months of the year in order to get inflation back to target.
Veronica Clark, an economist at Citigroup Global Markets Inc., said in a note that "just about all the data released since the October BoC meeting... have pointed towards generally stronger demand than the BoC likely assumed." It would be a bad idea to further slow the pace of hikes to 25basis points.
Macklem will follow a half-point increase this week with a quarter-point lift in January and March, and then stop at 4.5%, according to Clark.
The Financial Post has some background information that you can use to prepare for the announcement.
The Bank of Canada hasn't wrecked the economy.
The Bank of Canada could raise its rate by half a point.
The bulk of inflation is caused by profits in oil and gas.
Powell signals that the next interest rate increase will be smaller.
The economy is growing faster than expected and that raises the odds of a rate hike.
Peter Hall thinks inflation isn't the problem.
The banks want to avoid mortgage default for struggling borrowers.
The email address is kcarmichael@postmedia.