Is The Rate Hike Pause The Calm Before The Recession Storm?

As was forecasted by economists, Bank of Canada Governor Tiff Macklem decided to keep the overnight borrowing rate unchanged at 5%, following data suggesting high interest costs are finally making their way through the economy and delivering stagnant GDP figures.

Macklem pointed to signs of an alarming second quarter slowdown in China’s economic growth, with inflation across advanced economies showing signs of easing. Likewise, Canada’s economy, too, has abruptly decelerated, thanks to slowing consumption growth and housing activity, as well as negative impacts stemming from this season’s rampant wildfires.

However, many observers aren’t convinced that the heating economy has reached its peak, making the staple disclaimer by the central bank seem more pregnant with looming concerns.

“With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5% and continue to normalize the Bank’s balance sheet. However, Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed,” the Bank of Canada’s announcement read.

This follows after at least two provincial premiers have pleaded their case with the central bank to pause the rate hike strategy.

“I urge you to consider the effect higher interest rates are having on everyday people who are simply trying to make ends meet,” said Ontario Premier Doug Ford. Meanwhile, British Columbia Premier David Eby said, “I urge you to consider the full human impact of rate increases and not further increase rates at this time.”

It did not help that Finance Minister Chrystia Freeland put out a public statement on the rate hike pause, claiming it “is welcome relief for Canadians.”

“As Finance Minister, I fully respect the independence of the Bank of Canada as it delivers on its mandate to return inflation to target, which will support a return to the steady growth and stable prices which were hallmarks of the pre-COVID Canadian economy,” she said.

Derek Holt, an economist at the Bank of Nova Scotia, has expressed concerns that political remarks, including those made by Freeland, are increasing the perception among foreign investors that Bank of Canada decisions may be influenced by political considerations.

He also noted that one of the key reasons the central bank has increased interest rates ten times since March 2022 is to counterbalance the extensive spending by various Canadian governments across the political spectrum.

Spectators are now wondering if the pause was to service a political agenda should the political influence angle be proven true. And if so, is it only delaying the increase of rates?

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