Hundreds of thousands of jobs at risk if Bank of Canada raises key rate for eighth time Wednesday, economists warn

Another rate hike from the Bank of Canada this week risks pushing the Canadian economy into a deep recession that could cost hundreds of thousands of people their jobs, a growing number of economists worry.

The Bank is set to announce Wednesday morning whether it will be raising its key overnight lending rate for the eighth straight time, and markets are already pricing in a 25 basis-point (quarter of a percentage point) hike.

That increase, said economist Jim Stanford, would be a grievous mistake for a simple reason: The economy still hasn't felt the full impact of the seven rate hikes in 2022, and is already struggling.

I'm still convinced we're likely facing a recession this year and it will be all the deeper if the Bank of Canada continues this single-minded crusade," said Stanford, chief economist at the Centre for Future Work.

Even if they don't raise rates, we're going to see increasing slowdown from the rate increases that are already in the pipeline. So adding more would obviously make that even worse," said Stanford.

If there's a mild technical" recession - two straight quarters of shrinking GDP - there might not be many jobs lost. But a deeper recession could mean 300,000 people losing their jobs, and the unemployment rate hitting nine per cent, said Stanford.

In an attempt to get inflation under control, the Bank raised the overnight lending rate seven times in 2022, most recently bumping it by 50 basis points (half a percentage point) to 4.25 per cent in early December. The overnight rate began last year at 0.25 per cent, where it had been since the Bank dropped it three times in one month in March 2020, as the global COVID-19 pandemic was declared.

The theory is that by making it more costly to borrow money, people will spend less, eventually driving prices down. But lower spending by consumers means fewer customers and lower revenue for businesses, who in turn could end up having to cut jobs.

At National Bank Financial, economists Matthieu Arseneau and Taylor Schleich said the Bank of Canada has already hammered housing prices, and also caused a big dip in consumer confidence and business spending.

The most aggressive policy rate increase in a generation is taking its toll on the economy," Arseneau and Schleich wrote in a research note.

What might seem like a small additional hike could take an outsized toll given that the economy is already struggling, they added.

Those who argue that another 25 basis-points increase will not kill the economy forget that at this stage of the business cycle, the impact of further hikes is not linear. In other words, the marginal increase could be the straw that breaks the camel's back," Arseneau and Schleich wrote.

A survey released last week by the Bank of Canada found consumers are keeping a wary eye on their spending because they expect inflation to keep soaring.

The survey found that a majority of Canadians are expecting a mild to moderate" recession over the next 12 months.

The survey found that Canadians have reduced their spending on a wide variety of goods and services in response to interest rate hikes and inflation, and a growing share expect to keep cutting back.

A business confidence survey by the Bank also found companies are pulling back on plans because they expect sales to slow. According to the business outlook survey, two-thirds of firms expect a recession in the next 12 months.

Bank of Canada governor Tiff Macklem has made it clear, said Stanford, that he's committed to bringing inflation down to the Bank's target of two per cent. Despite last year's series of hikes, the Consumer Price Index - a broad-based measure of inflation - was 6.3 per cent higher in December than it was a year earlier, Statistics Canada announced last week.

The Bank has said, quite clearly, they're going to get inflation down to two per cent no matter what. And while headline inflation has come down, it's nowhere near two per cent," said Stanford.

Macklem has also expressed concern that the relatively low unemployment rate is pushing inflation. That means, said Stanford, that the Bank is actively pushing for people to lose their jobs, making an interest rate hike Wednesday almost a certainty.

Tiff Macklem has been explicit in saying that five per cent unemployment is too low," said Stanford.