Back in October, the Bank of Canada raised rates for the fifth time this year but surprised markets by raising by 50 instead of the expected 75 basis points, seeming to signal a departure from the FED as it stormed ahead a week later with a 75 basis point hike. The Canadian dollar moved a fraction of a penny as a result, hardly any change at all and sits at 0.734545 against the USD where it's been range bound since the FTX scandal broke out.
Now, we have word this morning the BoC has hiked by another 50 basis points for a total of 6 rate hikes this year. At this point, the BoC is ahead of the FED by 25 basis points! That should last only a week as we find out next Wednesday what the FED will do. Will it be a 50 or 75 basis point rate hike for Americans?
This brings Canada's overnight rate to 4.25% while through the pandemic, the rate was at a historic low of 0.25%. The rate hikes started in Spring in line with the FED. This time, they included a statement that rate hikes 'may not need to rise further', which in my opinion is just a detractor to calm investors. Remember, the Trudeau government doubled Canada's national debt in the last 2 years so if people are wondering where the inflation came from, now you know the answer.
Like in the U.S.A., inflation is rampant in Canada and is much higher than the 4.25% interest rate we now have. This means rates will go higher and word is out that we are technically in a recession already. How bad are things going to get in 2023 as these rate hikes propagate through the system? We are just beginning to feel the first rate hikes from last April and May.
These so-called 'soft pivots' from 75 to 50 basis point rate hikes is all hogwash. October's 'soft pivot' of a rate hike of 50 basis point along with today's rate hike still add to a full percent increase in just 2 months. Canada's economy is sensitive to rate hikes and it's clear to me, the central bank is pushing us into a deep recession.
As famed 'Big Short' investor Dr. Michael Burry stated just a week ago, the U.S. is 'headed for multi-year recession'. Usually, where the U.S.A. goes, so shall Canada. We are so inter-twined that we are each other's biggest and most trusted trading partners. When the U.S. goes into recession, expect Canada to follow.
These higher interest rates are not good for the housing market. As a result, I expect a significant drop in home prices in 2023. If the BoC continues to raise rates into 2023 as I fully expect it will, then a full blown housing market crisis will erupt. This will also affect the bottom line for businesses that have been struggling to get back on their feet after these ridiculous lockdowns of the last 2+ years. We've already lost a lot of businesses. Expect more bankruptcies in 2023 and beyond.
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