ottawa –
The Bank of Canada’s efforts to restore price stability are expected to begin drawing to a close in 2024 as the fight against inflation concludes another year.
The central bank’s significant interest rate hikes have finally come to fruition, allowing the central bank to keep its key interest rate unchanged at 5% for the past few months.
Rising borrowing costs have slowed business investment and consumer spending, paving the way for lower inflation.
The economic slowdown is expected to pave the way for a rate cut as early as mid-2024, which would mark a turning point in the fight against inflation.
Desjardins, chief economist, said that while the central bank’s interest rate hikes had helped curb inflation, much of the slowdown in price growth also came from easing global price pressures.
“We’re looking at a 3.1% inflation rate, which is much less stressful than a year ago,” said Desjardins chief economist Jimmy Jean.
“And I think part of it is certainly the actions that the banks took. But the other part is also things that were expected to (resolve) on their own.”
Many of the global factors that contributed to the price spike, such as supply chain disruptions and soaring energy prices, have disappeared.
And now high interest rates are doing the rest of the work.
A return to price stability would be welcome news for Canadians, especially low-income households who have been hit hardest by rising food and rent costs.
But returning to low, stable inflation will come with some pain.
Those with variable rate mortgages were the first to feel the pinch of the rate hike. However, over time, the squeeze gradually spreads to other homeowners.
More Canadians are expected to renew their mortgages at higher interest rates next year, forcing them to cut spending elsewhere.
Paul Bewdley, a former deputy governor of the Bank of Canada, says this speaks to the unequal impact of inflation and interest rates.
“The tools used at the Bank of Canada, particularly interest rates, have very different impacts on people,” Bewdry said.
“In some respects, we must not forget the groups that actually benefited from lowering (inflation), while there are other groups that were hit harder (by rate hikes).”
About 45 per cent of mortgages taken out before the central bank started raising interest rates saw their payments increase by the end of November, according to Bank of Canada researchers.
Researchers say nearly all remaining mortgage holders in this group will renew by the end of 2026, and their payments are likely to be higher.
This wave of mortgage renewals is expected to cool the economy.
According to forecasts, economic growth is expected to slow in 2024, before accelerating again towards the end of the year.
Desjardins expects a mild recession in the first half of this year, while other forecasters expect the economy to remain just above water.
But if the economy avoids recession and inflation returns to 2%, it will mean central banks have successfully walked the tightrope between raising interest rates too little and too much.
For workers, a weak economy means fewer job opportunities available and potentially slower wage growth.
The unemployment rate rose to 5.8% in November and is expected to continue rising next year.
Desjardins expects the unemployment rate to peak at 7.0% in the third quarter of next year.
The Bank of Canada has come under a lot of scrutiny in recent years, particularly from the political sphere, for its policy decisions since the onset of the COVID-19 pandemic.
Notably, Conservative Party leader Pierre Poièvre blames central banks for accelerating inflation, accusing them of funding government spending, and vowing to fire Governor Tiff Macklem. Worth it.
New Democrats and others, including the prime minister, have spoken out against the rapid rise in interest rates, citing the economic strain it would place on households.
Bewdley said the politicization of central banks during this period of high inflation underscores why it’s important to have a central bank that can make the right decisions, no matter how unpopular.
“I’m not surprised at how politicized banks become during periods of inflation. What I think is important is when this is over and people look back, what kind of credibility will banks have? My guess is that the bank’s credibility is going to be quite a bit ‘a little bit of credibility,”’ Bewdley said. This report by The Canadian Press was first published Dec. 24, 2023.
