Bank of Canada nears inflation battle's end; rate hikes impact economy and households

PTC Web Desk: As the year approaches its end in the ongoing battle against inflation, the Bank of Canada is anticipated to wind down its efforts to restore price stability by 2024. The substantial rate hikes by the central bank have contributed to maintaining a steady key interest rate at five percent in recent months.

These increased borrowing costs have led to a decline in business investments and consumer spending, consequently paving the way for lower inflation rates. The anticipated economic slowdown is laying the groundwork for potential interest rate cuts in mid-2024, marking a pivotal moment in the fight against inflation.

Jimmy Jean, Desjardins' chief economist, acknowledged the impact of the central bank's rate hikes in curbing inflation but also attributed a significant slowdown in price growth to the easing of global price pressures. Factors such as disrupted supply chains and elevated energy prices that contributed to steep price increases have gradually subsided, with higher interest rates now contributing to further stabilization.

While the restoration of price stability brings relief, particularly to lower-income households burdened by rising grocery bills and rents, achieving low and stable inflation is not without its challenges. The effects of inflation and interest rates differ among various groups, with variable rate mortgage holders among the first to feel the strain. As more Canadians face mortgage renewals at increased interest rates, they may be compelled to reduce expenses elsewhere.

Paul Beaudry, a former Bank of Canada deputy governor, highlighted the uneven impact of inflation and interest rates on different demographics. The disparity in how these tools affect people underscores the complexity of monetary policy's social implications.

Statistics from the Bank of Canada reveal that about 45 percent of mortgages taken before rate hikes had experienced increased payments by November's end, with the remainder likely to renew at higher rates by 2026. This trend of mortgage renewals is expected to have a cooling effect on the economy.

Forecasts suggest a sluggish economic growth in 2024, with Desjardins projecting a mild recession in the first half, while other analysts foresee marginal growth. However, successful navigation by the central bank between rate adjustments will likely determine a balanced economic outcome amidst varying predictions. The anticipated weaker economy might translate to limited job opportunities and slower wage growth for workers, with the unemployment rate projected to rise to 7.0 percent in the third quarter of the upcoming year.

The Bank of Canada's policy decisions during the Covid-19 pandemic have faced scrutiny, prompting political commentary and debates. Despite criticisms, experts emphasize the importance of the central bank's ability to make prudent decisions, highlighting the necessity of maintaining credibility beyond short-term political pressures.

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