Rate hike: stop or again?

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Rate increase: stop or still?

While inflation is coming down, the job market remains very tight. The Bank of Canada will look at both data before making its interest rate decision.

Tiff Macklem, Governor of the Bank of Canada

In the 1980s, eccentric singer Plastic Bertrand wondered, “What am I doing? I stop or I continue? Next January 25, Bank of Canada Governor Tiff Macklem will face the same dilemma about what to do with interest rates: “Stop or still?” »

To render its verdict, the institution will obviously look at a multitude of economic data with, in the first place, inflation. The latter rose to 6.3% in December on an annual basis, compared to 6.8% in November. Month over month, the consumer price index retreated 0.6%, a first since 2020.

This confirms the first signals that we It had already been two or three months since the peak of inflation was behind us, and it is decelerating, says economist Clément Gignac. Now, the challenge is to see how quickly we will go towards the Bank of Canada's target of 2%, underlines the senator, in an interview with Radio-Canada.

For Benoît Durocher, senior economist at Desjardins, the downtrend is well underway and will even accelerate in the coming months.

It was highly anticipated, because 'we noticed it when filling up with gas, that the price had dropped, that played a big role. Excluding food and energy, it has been stable for a few months. No real downward trend yet, but it's a matter of time before it follows, believes economist Durocher.

Inflation is therefore well off target, but it should weaken further in the coming months as the marked effect of the war in Ukraine (which had boosted the inflation in 2022) will dissipate in the data.

Averaging over the past six months, inflation has increased by 0.2% monthly. So prices continue to rise each month, but at much slower rates than in March or April last year, continues Mr. Durocher.

But the Bank of Canada is also taking a look at the job market. And it remains very dynamic with the creation of more than 100,000 jobs in December. If in general we applaud this kind of performance, this is not currently the case.

“The only market that worries the Bank of Canada is jobs. It's still very tight, wage increases remain significant… This is the only factor that could encourage the Bank to keep interest rates higher for a little longer.

— Mario Iacobacci, Economist at Deloitte

The Bank of Canada will also take its business outlook survey released Monday into consideration in making its decision. It shows that their confidence continues to weaken, in particular due to the weight of interest rates in their finances.

Given the current situation, will the Bank of Canada raise its key rate, which is currently at 4.25%? On this, economists do not agree.

There are those who are counting on a moderate rise in the Bank of Canada before taking a break for a few month.

Central banks have learned the lessons of the 1970s, they absolutely want inflation to be under control. So they will be brought to raise rates again, says Mr. Gignac.

It will be measured, 25 basis points, he continues. I don't expect a big increase. Thereafter, we will have breaks. We will stay on the sidelines.

Same observation for Benoît Durocher of Desjardins who expects another increase.

It will be the last, in January. We'll call it the rise in insurance. An additional 25 basis points. And by March, we're going to move forward even further in time, and I think the Bank will be reassured then that we're going in the right direction, he said.

Desjardins predicts a recession in 2023. By March, he should have less favorable economic data to be published. And there should be a status quo after the January decision, continues Mr. Durocher.

But for Deloitte, which this morning publishes a study on the economic outlook and also predicts a recession in 2023, the central bank should rather announce a break next week.

I think that they will stop. They have to wait for the impact of what they have done. We haven't seen it all yet. The real estate market is already in decline, the number of sales has fallen by more than 30%. The price has already started to fall. The construction sector has been hit very hard, he analyzes.

Some economists consulted expect a rate cut towards the end of the year, when inflation should have come down to almost 3%.

Towards the end of 2023, we should start to lower rates, believes Mr. Durocher.

But it is not excluded that a geopolitical event or political decisions could again change the trajectory of rates.< /p>

Keep in mind that interest rates have gone up a lot, but they are still lower than inflation. That said, it will also be necessary to take into account the federal budget and the provincial budgets, recalls Clément Gignac. If governments still go ahead with fiscal stimulus, as we have seen, we cannot rule out central banks raising rates further.

But even if rates fall, it would be surprising if they returned to the same level as before the pandemic, that is to say the floor, believes Deloitte.

Even if inflation reaches 1% at 3%, we should not expect a rapid decline in interest rates, confirms Mario Iacobacci of Deloitte. They will start lowering them at the end of the year, but it will be more next year. And we are not going to reach the rates we had before. We will rather stay at 3%. Which means that we will be in another world compared to the pre-pandemic situation.

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