Bank of Canada raises its overnight rate by 0.75%. Does this mean we’ll face recession soon?

On Wednesday, the Bank of Canada raised its key lending rate by 0.75% in attempt to slowdown the national economy and get a record high inflation back to its target level.

As a result of Tiff Macklem’s decision, the Bank’s overnight rate now stands at 3.25%, which is the highest policy rate among major advanced economies. In addition to it, the BoC noted we should expect more hikes in the nearest future.

“With the current inflation conditions, governing council still believes the policy rate will need to go up higher,” – the BoC noted.

Now, there are discussions about the Bank’s next moves as it keeps trying to assess how high borrowing costs should rise in order to restrain the inflation. Markets are predicting another hike by 0.50% next month.

The Bank’s statement suggests it has switched to considering smaller adjustments to policy, and is now looking at where it can start winding down the tightening cycle.

This rate hike follows an unexpected 1% increase in July, and 0.50% rises in April and June. Meanwhile, the central bank’s key rate was 0.25% until the beginning of March.

The BoC reiterated its promise to bring consumer price gains back to the 2% target and officials said they are still worried that growing inflation can become entrenched in expectations.

“If you are asking, whether we’ve already reached the peak, the Bank of Canada tells you it hasn’t happened yet,” – Avery Shenfeld, chief economist at CIBC noted. The bank is making it clear that “today’s outsized rate increase still leaves rates below the level they need to reach to quell inflation.”

According to Jimmy Jean, chief economist and strategist at Desjardins, the Bank of Canada needs to “stop sugar coating” the threat of a recession.

“I will look at how honest the central bank is with Canadians in terms of what they should expect. We have the second highest private sector debt to GDP in the world so definitely our economy is more vulnerable to rate hikes than many others,” – Jean said.

“In my opinion, the Bank of Canada should stop sugar coating things and admit that we’re at elevated risk for a recession. We expect a mild recession early in 2023.”

Jimmy Jean says it will take 6-8 quarters to see the full influence of growing interest rates, but the impact on the jobs market will begin to show very soon.

Stephen Brown, senior Canada economist at Capital Economics, expects a smaller rate hike in October.

“The central bank is still concerned about the risk of high inflation expectations becoming entrenched, but with the economy now slowing significantly and inflation easing by more than the Bank expected, we believe we’ll see a 0.25% rate increase next month,” – Brown noted.

There are only two rate meetings left for this year, and the next one is scheduled for October 26.