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Canada’s Rate-Hike Pause: All You Need To Know

Bank of Canada Governor, Tiff Macklem, recently stated that no further interest rate rises would be needed if, as expected, the economy stalled and inflation came down. It is to be noted that for the past 11 months there have been continuous rate hikes at 4.5% to contain inflation. In December 2022, the inflation figure touched 6.3%, which stood above the Central Bank's target of 2%. In January 2023, the Central Bank announced a rate-hike pause 'while it assesses the impact of the cumulative interest rate increases.’ In his speech to analysts, Macklem said, "Inflation is turning the corner. Monetary policy is working," and "economic growth would be close to zero through the third quarter of this year."

As per a report by Bloomberg, Macklem said, the central bank needed time to gauge how households and businesses were adapting to higher interest rates before it made further moves. The report also added that the real estate market would probably soften further before it stabilized later this year.

But what can change this? As per Fitch Ratings, 'further monetary policy tightening, a larger-than-expected housing market downturn or a deeper-than-forecast US recession would test Canada’s economic resilience.'

Fitch Ratings predictions for 2023: 'We now expect the BOC to keep the policy rate at 4.5% throughout 2023, given that the BOC forecasts headline inflation to fall to 2.6% this year and its preferred inflation measures appear to have peaked. However, continued tightness in the labour market, keeping wage growth strong, makes policy rate cuts unlikely this year. We see Canadian home prices falling by 5%-7% this year, with a structural housing shortage providing some support. The household debt service/disposable income ratio has risen, but it remains below pre-pandemic levels.'

What can turn things? The outlook is pretty okay except if the U.S. goes into a deep recession. Fitch Ratings currently expects the U.S. to have a mild recession, but a severe one would mar Canada’s economic performance due to close trade and investment links, and also the probable impact on commodity prices. In all, under Fitch Ratings' baseline macroeconomic projections, they have forecast the general government fiscal deficit to narrow to 1.1% of GDP in 2023 and 0.7% in 2024, from 2.6% last year.

If you too are in a dilemma about what the pause in the rate hike has in store for you as an individual or for the economy in general, or if you have particular questions related to these, do write to us at LendX Financial in Brampton, Greater Toronto Area.

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