Stubborn inflation is driving a surge in interest rates, prompting concerns about the Canadian economy’s resilience. The Bank of Canada has taken action in response to higher-than-expected inflation, leading to a revision in expectations for the country’s monetary policy. As a result, mortgage rates are likely to increase this summer and remain higher until inflation shows significant improvement in reaching the target of 2 per cent.
Despite a strong start to the year with a 3.1 percent expansion in GDP during the first quarter, there are signs of potential challenges ahead. The housing market has shown signs of recovery, but there is a possibility of a slowdown in consumer spending due to increased household debt-service costs resulting from higher interest rates. Consequently, the risk of a brief recession remains elevated, and the expected growth for the year is approximately 1 per cent.
The Bank of Canada, having recently paused its monetary tightening, has changed course once again due to persistent core inflation around 4 per cent and rising inflationary pressures in the housing market. To combat inflation, the Bank may raise interest rates further, potentially reaching a real policy rate 100 to 200 basis points above the considered neutral level, the highest in over 15 years. While the economy’s ability to withstand such rates remains uncertain, it is anticipated that the economy will likely slow down, leading to the possibility of rate cuts by the Bank in 2024.
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