Inflation Could Spark Economic Slowdown

A monetary policy-induced economic slowdown is possible if inflation persists. However, for now, the probability of a recession happening in the near term remains low, judging by tight labour market conditions, terms of trade (the ratio between the price of exports and imports), and recoveries in sectors severely impacted by the pandemic, says the Conference Board of Canada in its latest ‘Economic Quick Take.’ The organization’s observations come after the Bank of Canada increased its target for the overnight rate to 1.5 per cent, with the bank rate at 1.75 per cent and the deposit rate at 1.5 per cent. This is the second consecutive time that the Bank of Canada has increased rates by 50 basis points. The last time this happened was more than two decades ago. The Conference Board says the housing market could act as a headwind to economic growth because this sector is affected by the impact of rising rates. With the bank expected to continue its rate hikes, buyers (especially first-time home buyers) could hold off on any home purchases for now until the picture for prices and mortgage rates becomes clear. What tends to follow a sharp drop in demand for housing is a negative wealth effect on homeowners and, ultimately, economic growth.