After the Bank of Canada held its key interest rate at five per cent, an economist says that inflation will be the key factor in determining whether more rate hikes are coming, and warns that a recession is a real possibility.
“We’re on the razor’s edge here,” David Macdonald, a senior economist at the Canadian Centre for Policy Alternatives told CTV News Channel’s Marcia MacMillan on Wednesday. “The danger is that it doesn’t take a lot to push us into negative territory.”
Macdonald says Canada has been “skating along” since February when the economy began to stagnate, but there hasn’t been a big decline in real GDP, an economic metric used to show the economic output of the country in a given year.
The danger of an economic contraction exists, Macdonald argues, because of a lack of “strong underlying growth.”
However, higher interest rates are also starting to bite, according to Macdonald, with particularly large declines in residential construction — a key driver of economic growth in Canada over the past decades.
“People just can’t afford new houses because their mortgage payments would be too big.”
Despite the Bank of Canada deciding against raising the key interest rate this month, Macdonald says the possibility of further hikes still exists, particularly if core inflation metrics remain high.
“We’re not likely to see any rate decreases,” Macdonald warns. ” If inflation remains high… we may well be in for another rate increase.”
Watch the full interview by clicking the video at the top of this article.