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Initially, the BoC refused to acknowledge that inflation would continue. She insisted the inflation was temporary and vowed to keep interest rates low for a few more years. As late as March 2021, former BoC deputy governor Lawrence Schembri estimated inflation to be moderate at 3%. Instead, inflation hit a 30-year high in June 2022, peaking at 8.1%.
The BoC’s main task is to keep inflation close to a target of 2% annually. When it became clear that inflation was well in excess of this target, the BoC quickly changed course and began raising interest rates quickly and drastically. In six consecutive announcements since March 2022, it raised the federal funds rate to 3.75% – one of the steepest and fastest rate hikes on record.
High interest rates tend to slow spending, borrowing, investment and labor demand.
The effects of the rate hikes are already visible. Families and businesses have already started to spend less, house prices have stalled and the stock market has retreated.
The BoC stated its aim to control prices, even if this is at the expense of wage growth and a recession.
Recessions aren’t always bad
A recession isn’t the end of the world – it’s just a natural part of our economic cycle. Fears of a recession can easily hit you harder than an actual recession.
For example, in December 2018, the North American stock market took a beating as the NASDAQ, S&P 500 and the DOW fell to 15-month lows. In fact, just a month or two later, the stock market returned about 20%.
“It’s been a very volatile, risky year and economic conditions have weakened,” said Craig Alexander, chief economist at Deloitte Canada. “When you’ve sold [assets] 2018 and didn’t invest in 2019 because you were afraid of a recession and you missed out on one of the best years in the stock market.”