Bank of Canada Holds Interest Rates Steady Amid Cooling Economy

The Bank of Canada has decided to maintain its benchmark interest rate at five percent as signs of an economic slowdown become increasingly evident. This decision aligns with the expectations of economists and financial experts. The central bank's rapid series of interest rate hikes since early 2022 has made significant progress in curbing runaway inflation.

It's worth noting that the effects of interest rate changes can take up to 18 months to fully materialize. With rates climbing from virtually zero to five percent in just over a year, there's a risk of over-tightening monetary policy, potentially causing an economic slowdown.

Recent financial indicators provide cause for concern. July's job data indicated a loss of approximately 6,000 jobs, with a slight uptick in the unemployment rate to 5.5 percent. Additionally, GDP data for the second quarter of 2023 revealed economic contraction, marking the first decline since the onset of the pandemic and suggesting the possibility of a mild recession.

Jim Thorne, a strategist at Toronto-based investment firm Wellington-Altus, is critical of the central bank's approach, suggesting that not only is there no valid reason for further rate hikes, but it's also challenging to justify some of the previous hikes retroactively. Thorne believes that the Bank of Canada should have stopped at 2.5 percent to allow the situation to stabilize, cautioning against using monetary policy as a precision tool, as it can have broad and unintended consequences.

Thorne predicts a hard landing for Canada's economy in the coming year due to excessive debt and strained consumers, rather than the hoped-for soft landing. He questions the rationale behind the Bank of Canada's continued rate increases, especially when real gross domestic income is in negative territory.

While some, like Thorne, fear that the central bank may have gone too far with rate hikes, the bank remains prepared to raise rates further if necessary, expressing concerns about persistent inflationary pressures.

Armine Yalnizyan, the Atkinson Fellow on the Future of Workers, argues that raising interest rates may not effectively address the inflation problem and could potentially worsen the situation.

Royce Mendes, an economist with Desjardins, points out that policymakers at the central bank are hesitant to rule out additional rate increases entirely, as prematurely signaling the end of rate hikes could disrupt financial conditions. However, he believes that the recent string of weak economic data makes it likely that the Bank of Canada has completed its rate hike cycle.

For homeowners like Shahan Ahmed, the decision to potentially halt rate hikes couldn't come soon enough. Ahmed, who owns a home in Brampton, purchased a second property for investment purposes in 2021. He anticipated that the rate on his variable-rate mortgage would increase gradually, but the rapid succession of interest rate hikes, often in sizable increments, caused his mortgage payment to nearly double. Struggling to cover his costs, Ahmed has taken on a second job and now works 15-hour days.

Despite the challenges, he's hesitant to sell his properties because doing so would result in a significant paper loss. Ahmed, like many others, hopes that there won't be any further rate hikes, as he and his family are at their breaking point, unable to absorb additional financial strain.