Bank of Canada hikes key interest rate to 4.75%
While Canada’s economy has remained resilient in the face of heightened interest rates meant to slow it down, RBC warns it may only be delaying the inevitable.
In its latest macroeconomic outlook, Royal Bank of Canada economists predict a mild recession to come in both Canada and the U.S. in either the third or fourth quarter this year, about a quarter later than previous estimates.
“The only true ‘soft landing’ scenario is one where inflation pressures slow quickly back to target rates without a deterioration in the economy, and that still looks unlikely,” the report reads.
“Even near-term positive growth surprises will only delay, rather than prevent, a ‘bumpy’ landing.”
On Wednesday, the Bank of Canada raised interest rates by 25 basis points to 4.75 per cent, its first interest rate hike since January. Meanwhile, the next U.S. Federal Reserve announcement is scheduled for next week.
In keeping in line with most economists’ reaction to Wednesday’s hike, RBC expects further hikes to come.
“We do […] expect both central banks to move key policy rates higher again by 25 [basis points] in July, unless economic data deteriorates more than expected before then,” the report reads.
While the economy has remained upbeat, RBC is seeing cracks beginning to form, with spending on necessities flattening and job listings on the downturn.
“Although unemployment rates are exceptionally low, there are signs that labour demand is weakening,” the report found. “Fewer workers are quitting their jobs—normally a sign that confidence in labour markets is fading.”