Higher rates risk economic damage, Fitch warns

Amid concerns that further monetary tightening could hamper the economy, Fitch Ratings says that the Bank of Canada is probably done raising interest rates.

Citing evidence of easing inflation, the rating agency said that it’s now unlikely that the central bank will raise rates again in 2023, following last week’s 25 basis point hike.

“Further monetary policy tightening, a larger-than-expected housing market downturn or a deeper-than-forecast U.S. recession would test Canada’s economic resilience,” it said.

Fitch previously forecast that the Bank of Canada would stop raising rates after they hit 4.0%, but it now sees the bank keeping rates at 4.5% throughout 2023, given that the central bank’s latest forecast is for headline inflation to fall this year, “and its preferred inflation measures appear to have peaked.”

Alongside the risk of raising rates too high, the economy also faces the threat of greater weakness in the housing market, which would weaken consumption and economic growth, Fitch said.

And, a more severe recession in the U.S. would also negatively affect Canada’s economic performance, it noted.

“A more pronounced economic slowdown and/or higher interest rates could lead to weaker fiscal [results] than we expect,” it said.

Fitch’s current forecast is for government deficits to narrow this year and in 2024, after the “windfall” in oil and gas revenues in 2022 “helped narrow the fiscal deficit alongside the rolling off of pandemic support measures.”

At the same time, Fitch noted that it doesn’t expect the Bank of Canada to cut rates this year either, pointing to continued strength in the labour market, which Fitch credits for “keeping wage growth strong.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.