In this period of great economic 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? The Bank of Canada may have to raise its key rate further, just following in the footsteps of the American Federal Reserve (Fed) which is determined to give inflation another solid push.
On Wednesday, the Fed raised its target interest rate by three-quarters of a percentage point to 3.25%. But in the wake of that announcement, Fed Chairman Jerome Powell has made it clear that more big hikes are coming soon. The Fed’s ultimate goal is to reduce inflation to just 2% by 2025, but it has recently hovered around 8%.
According to its forecasts, the Fed’s key rate should rise another 1.25 percentage points by the end of the year. This would raise the Fed’s key rate to at least 4.4%.
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Bank of Canada
If the Bank of Canada follows the Fed, this means our Canadian key rate will probably rise another 1.25 percentage points, bringing it to 4.5%.
If so, Canadian borrowers will face another significant rate hike (about +1.25%) on mortgages, personal loans, car loans, business loans, etc.
Question: What happens if the Bank of Canada decides to ignore upcoming US Fed rate hikes?
The Canadian dollar weakened
One thing is for sure, the Canadian dollar could take another slap. At the beginning of the current year, the Canadian dollar was trading at 80 US cents. Today, it barely crosses the 74 US percent 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, the fall in the Canadian dollar will no doubt worsen.
And then worse? Because we import so many goods from the United States, the weaker Canadian dollar compared to the weaker American currency means that products imported from our major trading partner cost more. It affects our wallet.
In 2021, the value of Canada’s imports from the United States will reach nearly $300 billion.
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The American Challenge
With a rate hike of 3.25%, the US Federal Reserve predicted a major slowdown in US economic growth at the end of the year. She is talking about a mere 0.2% growth in real GDP. He said the growth will increase to 1.3 percent in 2023.
With its credit crunch, the Fed wants the unemployment rate in the United States to rise from 3.7% (currently) to at least 4.4% in 2023.
This is well below the 9.3% unemployment rate that was in full swing during the 2008-2009 recession.
The chances of the United States falling into a recession are high because of the dramatic increase in interest rates. But if it does, we’re talking about a “modest” recession here.
The same is true for Canada and its major provinces, including Quebec and Ontario.
A word of advice: This is not the time to start spending crazy!