The Bank of Canada (BoC) surprised markets after hiking rates by 0.5 of a percentage point yesterday (bringing the base rate to 3.75%), below the 0.75 hike most economists expected.
Why it’s happening: It’s not the ghouls and goblins that have BoC governor Tiff Macklem spooked this Halloween, but the threat of a tough recession amid a global growth slowdown.
- Sectors that are sensitive to high borrowing costs are feeling the pain—home prices are down more than 20% from their February peak and sales volumes are slumping.
- Even though job vacancies are still high, the economy shed more than 100,000 jobs over the summer, and total employment (all who are in the workforce) fell.
Zoom out: The US Federal Reserve is expected to raise its interest rate by 0.75 percentage points to 4% next week, bringing it slightly above the Bank of Canada’s.
- There’s a risk that could weaken the loonie against the US dollar, making many imports more expensive for Canadians and adding upward pressure on inflation.
- “...by doing less than markets were pricing in, the bank risks sending too dovish a message that it will eventually have to reverse,” according to Capital Economics.
Yes, but: Not everyone agrees that further rate hikes of any size are a good idea—some economists argue that slowing growth, not inflation, is the most serious problem we face.
- “Today's hike is another nail in the coffin of the post-COVID recovery. Pretty incredible when the central bank acknowledges a 50-50 chance of recession (I'd say it's 90-10),” tweeted economist Jim Stanford.
What’s next: The economy might be slowing down, but Tiff Macklem made it clear today that he isn’t done raising rates—so expect to see another jump before the holidays.