Bank of Canada (BOC) has announced its fourth consecutive interest rate hike to 3.25%, the highest level since early 2008. It has further boosted the bank rate to 3.5% and the deposit rate to 3.25%. the latest hike is again part of measures being used to control spiralling inflation that continues to be driven by ongoing supply chain disruptions, the pandemic, and the war in Ukraine. Even with this adjustment, the governing council has warned that further hikes may still be needed to achieve the inflation target of 2%.
Though inflation has fallen slightly in July to 7.6% since its 30-year high of 8.1%, the BOC notes that this was due to a fall in gasoline prices while the rest of the economy continued to be burdened by price pressures, especially in the services sector.
The most recent hikes have helped to cool the housing market by driving up mortgage rates. This comes as good news following a trend of unsustainable growth in property prices during the pandemic. The economy is however still battling excess demand and a tightening labour market. Though GDP rose by just 3.3% during the second quarter, consumption rose stronger by about 9.5% and business investment also increased by almost 12%.
The Canadian Federation of Independent Business (CFIB) has expressed concern that the new interest rate hike will badly affect small businesses. A CFIB survey of 2,533 members found that 70% of small business owners expect the new hike to negatively impact their operations as many are still struggling with pandemic debt. The situation is further compounded by rising costs and labour shortages.
To cope with this, about a third of businesses intend to increase their prices by at least 6% in the coming 12 months. 79% of small businesses had already raised prices over the past year. 81% of respondents also expressed concern that the federal government did not understand the cost pressures they faced. CFIB president, Dan Kelly, is urging the government to take swift action on cost relief by halting further planned federal tax hikes and instituting promised measures to reduce credit card processing fees for small merchants.
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