In this period of great financial stress due to inflation and rising interest rates, the coming months will be even more difficult. The risks of falling into recession are increasing.
Why ? Because the Bank of Canada will have to raise its key rate further, simply a matter of following in the footsteps of the American Federal Reserve (Fed), which is firmly determined to give inflation another solid push.
On Wednesday, the Fed raised its target interest rate by three-quarters of a percentage point to a range of 3 to 3.25%. But in the wake of that announcement, Fed Chairman Jerome Powel made it clear that more major hikes will follow soon. The Fed’s ultimate objective is to reduce inflation to just 2% by 2025, whereas it was hovering around 8% recently.
According to its projections, the Fed’s key rate should rise another 1.25 percentage points by the end of the year. This will propel the Fed’s key rate to at least 4.4%.
Bank of Canada
If the Bank of Canada follows the Fed, this means that our Canadian key rate might possibly rise another 1.25 percentage points, bringing it to 4.5%.
If so, that means Canadian borrowers would face another significant rate hike (around +1.25%) on mortgages, personal loans, car loans, business loans, etc. .
Question: What would happen if the Bank of Canada decided to ignore the upcoming US Fed rate hikes?
The Canadian dollar weakens
One thing is certain, the Canadian dollar might take another slap. At the beginning of the current year, the Canadian dollar was trading at 80 cents US. Today, it barely manages to hold above the 74 US cent mark. It has thus lost 7.5% of its value in recent quarters.
If the US Federal Reserve continues to raise its key rate by another 1.25 percentage points and the Bank of Canada does not, there is no doubt that the Canadian dollar’s fall might worsen.
And worse following? As we import a lot of goods from the United States, the weaker the Canadian dollar is compared to the American currency, the more the products imported from our main trading partner will cost. This will affect our wallet.
In 2021, the value of products imported from the United States by Canada amounted to nearly $300 billion.
The American Challenge
With the rate hike to 3.25%, the US Federal Reserve anticipates a major slowdown in the growth of the US economy at the end of the year. She is talking regarding growth of barely 0.2% in real GDP. Said growth would rise to around 1.3% in 2023.
With its credit crunch, the Fed wants the unemployment rate to rise in the United States, 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 fall into recession because of the spectacular rise in interest rates are high. But if that were to happen, we’re talking regarding a “modest” recession here.
Same thing for Canada and its main provinces, including Quebec and Ontario.
A word of advice: this is not the time to embark on crazy expenses!
