EDITORIAL: Canadians are trapped in an economic vice

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Given that our economy contracted rather than grew in the second quarter of this year, contrary to forecasts, there is no good reason for the Bank of Canada to raise interest rates again on Wednesday.

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When the central bank raises its key interest rate, commercial banks increase their interest rates on mortgages and other business and consumer loans, creating greater financial hardship for millions of Canadians.

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Since incorrectly predicting in 2020 – after the start of the pandemic – that annual inflation in Canada would remain at historically low levels – less than 2% per year – through 2023, the central bank has raised its key interest rate 10 times since March 2022 was 0.25% and rose to 5.0% in July.

The good news is that the annual inflation rate, which hit a 39-year high of 8.1% last June, has fallen – which is the purpose of higher interest rates – and fell to a low of 2.8% in June this year. has fallen from the target rate of 2% annually with a range of 1% to 3% set by the bank and the Trudeau government.

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The bad news is that annual inflation rose to 3.3% in July, once again outside target, increasing speculation of another rate hike by the central bank on Wednesday.

But last week, Statistics Canada reported that Canada’s economy shrank at an annual rate of 0.2% in the second quarter of this year (April to June), well below the Bank of Canada’s forecast of a 1.5% increase.

Many economists believe Canada’s economic growth also stagnated in July.

All of this suggests that for now there is no need for the central bank to raise interest rates again on Wednesday.

Yet Canadians are still in a bind: inflation, the tough spot and higher interest rates are the sticking point.

The Bank of Canada now assumes that the annual inflation rate will not return to the target of 2% until mid-2025.

Meanwhile, Canada’s unemployment rate rose for the third straight month in July to 5.5%, an indicator of a slowing economy and another potential economic risk – a severe economic recession as opposed to a mild one.

In other words, the economic rollercoaster that Canadians have experienced in recent years is far from over.