The Bank of Canada increased its benchmark rate another quarter of a point to 5% on Wednesday, its 10th rate hike since March 2022 and the second one since hitting pause in January. The increase was widely expected given the surprisingly strong consumption growth in the first quarter and last week’s strong Canada jobs report highlighting an impressive gain in full-time employment in June.

While the central bank expects the Canadian economy to slow in response to the increase in interest rates — averaging 1% through the second half of 2023 and the first half of 2024 then picking up to 2.4% in 2025 — recent retail trade and other data suggest more persistent excess demand in the economy.

Inflation, which hit a peak of 8.1% last summer, eased to 3.4% in May. The central bank said in an updated forecast that the Consumer Price Index (CPI) inflation will hover around 3% for the next year before easing to 2% in mid-2025. 

Scotiabank’s Chief Economist Jean-François Perrault spoke with Perspectives about what’s behind the latest rate hike, recession speculations, whether the central bank is factoring in Canadian households' ability to meet their obligations amid rising interest rates, and what to expect from September’s policy rate announcement.

As was widely expected, the Bank of Canada increased its policy rate a quarter of a percentage point, to 5%. What factors played into that decision?

There are a few factors that played into the decision — and I think it builds on the central bank’s decision before this one, which was also an interest rate increase — and that is essentially linking it to stronger than expected economic activity. In particular, the Bank of Canada points to the strength of consumption, which accelerated earlier this year; to the strength of the housing market, which is of course the concern if it is trying to slow things down; and to inflation data, which suggested inflation is a little bit more stubborn than anticipated. As a result, it pushed back its expectation of when inflation is going to return to target.

It’s a series of factors that all suggested that maybe the central bank needs to do a little bit more to make sure that inflation is in fact going to land where it wanted it to, a little bit later than they wanted it to.


You have to keep in mind that the bank is raising interest rates because they want us to behave differently. They want us to save more, spend less, so they want it to hurt.”

Jean-François Perrault, Scotiabank’s Chief Economist

After a bit of a lull, people are again talking about the possibility of a recession later this year, despite strong jobs numbers and other data showing the economy to be robust. What do you think? Is a recession on the horizon?

We have been forecasting a recession for quite a while, but we have had to admit that based on the strength of data that we’ve seen so far this year and the resilience that we are seeing on the household financial side that it seems increasingly less likely that we will have two quarters of decline in economic activity. Certainly, the Bank of Canada doesn’t seem to have a recession in its forecasts; it doesn’t seem to have two consecutive declines in GDP (Gross Domestic Product).

At the margin, what the bank published today gives us some degree of comfort that the odds of avoiding recession are perhaps higher today than we would have thought a few weeks ago.

In a survey this week from insolvency firm MNP, more than 50% of Canadians said they are $200 or less away from not being able to pay all their bills at the end of the month. Rising rates and mortgage payments are a big part of that. Surely the Bank of Canada is sensitive to the effects of the increases, not just on households but also businesses. What are your thoughts on the central bank’s willingness to nonetheless stay the course?

The Bank of Canada is counting on this. You have to keep in mind that the bank is raising interest rates because they want us to behave differently. They want us to save more, spend less, so they want it to hurt. And if Canadians are starting to feel the impacts of rate increases, then the bank can say that’s proof that what it has been trying to engineer is starting to bear fruit. Now again, keep in mind, bearing fruit in this case means causing a bit of harm to ensure that inflation comes down.

I would say the bank probably takes a little bit of comfort from this survey in that it might be showing that the rate increases are finally starting to get traction. And maybe that means that, as it thinks about rates going forward, it’s more comfortable with keeping them at current levels, as opposed to thinking it might need to raise them a little bit more.

Looking ahead to September, can we expect another rate hike announcement? What would need to happen for the Bank of Canada to pause the rate hikes? Is a rate cut just a dream at this point?

Certainly, a rate cut is a dream at this point. And it looks unlikely at this point that it will raise again in the next announcement. The Bank of Canada has made it pretty clear in its decision that it is going to be data dependent, that it doesn’t have a firm view as to whether or not it would need to raise more.

That will be a function of whether the economy slows, whether inflation continues to slow, whether there are indications the labour market is slowing as well. We are reasonably confident that’s going to occur — not 100%, but reasonably confident. If it does, then they are probably done.

The flipside of that is if there is no slowdown to economic activity, if employers keep hiring people, if inflation remains at current levels, then we should expect them to do a little bit more in September.

We’re still dealing with very, very significant labour shortages.

One of the reasons the labour market has been as robust as it has been, is that firms are still desperately looking for workers. A slowdown in the rate of job creation, perhaps a reduction in number of vacancies is what’s needed. But there still are a tremendous number of vacancies out there to help absorb the vast number of new arrivals to Canada that we’ve seen so far this year.


For more takeaways, watch the rate hike breakdown below: