The Canadian Economy's Response to Rising Interest Rates

Canadians are not feeling optimistic about the short term future of the Canadian economy. Many are expecting inflation to remain high for the foreseeable future, and that the impact of high interest rates is far from over. One third of Canadian businesses expect a recession in the next year. Business confidence is the lowest we have seen in more than a decade, as most businesses are reporting slowdowns in sales growth, and one third of Canadian businesses are experiencing outright declines. More than half of all Canadians are also expecting a recession to hit in the next year, which is up 50% compared to last quarter. Most discretionary goods are seeing a slowdown in demand. The real estate market is also experiencing a slowdown caused by decreasing demand.

The Bank of Canada's aggressive interest rate hikes seem to be working as intended to slow down the economy. The latest inflation report indicates a slowdown in inflation to 3.8%, which is down from 4% in August. However, this is still considerably higher than the Bank of Canada's goal of 2%. Canadians are actually starting to see some financial relief in the grocery aisles, as the cost of some goods begin to lower for the third straight month. The cost of gasoline is also falling, but still up 7.5% compared to the same time last year. The labour market is also tightening, as intended, with unemployment rates inching higher. Many experts are now predicting that the Bank of Canada will hold interest rates steady come October 25th, due to the latest reports.

Due to the higher interest rates, two in five homeowners are close to or above their maximum affordable mortgage payments. Homeowners with variable rate mortgages have been hit exceptionally hard, with 85.1% of variable rate mortgage holders reporting they have been negatively affected. Despite these findings, the Bank of Canada has said that most fixed rate mortgage holders will be able to meet higher payments at renewal and think the likelihood of default is low.

Many financial institutions are predicting that interest rates will hold steady until mid 2024, and will then start to decline. The interest rate is expected to reach the neutral 2.25% by mid 2025.