Backlash grows against interest rate hikes as economists predict 75-basis point bump Wednesday

The Bank of Canada is set to announce another major rate hike on Wednesday to bring down soaring inflation amid growing criticism the central bank's aggressive rate hikes will cause a painful and unnecessary recession.

Economists forecast the Bank of Canada will hike the overnight lending rate by three-quarters of a percentage point bringing the rate to four per cent from the current 3.25 per cent. Wednesday's rate hike will be the sixth this year, after the central bank kept the overnight rate at a historic low of 0.25 per cent during the pandemic until March 2022.

But the Bank of Canada's approach is facing mounting backlash from economists, and now, a political leader.

On Oct. 23, NDP leader Jagmeet Singh sent a letter to Prime Minister Justin Trudeau asking the Bank of Canada to dampen its aggressive approach to rate increases and stating that government should do more to help Canadians weather the inflationary storm. He later added on CTV that there's absolutely no merit to their approach."

Jim Stanford, an economist and director of the Centre for Future Work, said a recession is likely if the Bank of Canada continues to move forcefully on interest rates, because if history is any guide, it happens every time the central bank moves rates too quickly.

In the early '80s and early '90s the Bank of Canada's drastic rates hikes resulted in two painful recessions, he said.

Is it worth it to have a recession to get inflation down?" asked Stanford. The Bank of Canada should be more gradual and targeted in its approach."

Bank of Canada governor Tiff Macklem said the main goal is to curb soaring inflation, which reached a high of 8.1 per cent in June before dropping to 6.9 per cent in September - far from the Bank's two per cent inflation target.

The inflation numbers for September were higher than forecast and without government intervention to cool inflation, the central bank is using it's most effective weapon to ensure the country doesn't see runaway inflation, said David Macdonald, senior economist with the Canadian Centre for Policy Alternatives.

The central bank is concerned that if inflation is left unchecked, it could get baked into the economy in the form of higher wages creating runaway inflation seen in the 1980s, when rates hit almost 13 per cent. Therefore, a contraction in the economy is needed to ensure inflation doesn't become a permanent fixture.

The Bank convinces Canadians that they will likely cause a recession if they don't get spending down and it creates this psychological effect where Canadians think they're becoming less wealthy so they decide to spend less," Macdonald said, adding it creates collateral damage for the economy in terms of job cuts.

And people are already bracing for impact.

Six in 10 Ontarians say they're concerned about the impact of interest rates on their financial situation and about their ability to pay their debts, according to a recent poll by Ipsos conducted for MNP LTD, a professional accountancy and business advisory firm. People will start being more careful with their spending habits as budgets tighten, it added.

Douglas Porter, chief economist and managing director of BMO Financial Group, said the central bank is in a difficult bind and needs to hike rates, even if it causes an economic downturn.

BMO has forecast the overnight rate will reach 4.25 per cent by the end of the year, but Porter said it could increase further to tackle inflation, especially after strong language from Macklem on ensuring inflation reaches the two per cent target.

Spending on necessities such as food, energy, and shelter has increased drastically during the pandemic and it's impacting households with less income, he said. If that continues, the wealth gap will only widen. While increasing wages can help, if inflation keeps rising for a prolonged period of time, wage increases won't save households from the higher cost of living. Especially as workplaces also tighten the purse strings.

Porter said it's too late to tame inflation without causing some pain at this point. If inflation continues to run at current levels it will continue to hurt workers and lower income households the most."

However, real wages - wages that are adjusted for inflation - have dropped for two-thirds of Canadians over the last two years, Macdonald said. Skyrocketing prices have been driven by the housing market, supply chain issues, and geopolitical unrest in Europe.

That means there are alternatives to curb inflation without raising rates further, Stanford said.

Limiting the amount of credit or loans in the housing sector, which exploded during the pandemic, would help bring inflation down. In Toronto, home prices increased by 40 per cent as it became easier for buyers to borrow from the lenders due to low interest rates. More investment in affordable housing and enforcing rent control also aide in the slowing of inflation, he said.

The federal government can also tax corporations - which have profited from inflation - more, to help workers and lower income households who have felt the harsh impact of soaring costs, Stanford added. The government also has the power to spend more when the economy is weak and less when the economy is strong, and should use those fiscal powers responsibly, he said.

Macdonald also pointed out that Canada's Competition Bureau's investigation of the grocery industry, to examine skyrocketing food costs, is a needed step to combat inflation.

Canada is ahead of so many of the G7 countries when it comes to hiking interest rates, we don't need to win this race," Stanford said. If we think Canadians have too much money in their pockets, that's the wrong approach. There are many other factors at play causing inflation which need to be targeted. Mass economic pain is not necessary."

Clarrie Feinstein is a Toronto-based staff reporter for the Star. Reach Clarrie via email: clarriefeinstein@torstar.ca