With the unemployment rate at 5% in Canada and inflation at 6.3%, the Bank of Canada did not hesitate to raise the overnight rate today by a quarter percentage to 4.5%.
In a recent interview, Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), said that 2023 will be “a tough year, tougher than the one we leave behind.” Ms. Georgieva also said she expects one-third of the world economy will be in recession by the second half of this year, stating the world’s three leading economies – the U.S., European Union and China – are all slowing at the same time.
The impending recession in the second half of 2023 is not expected to be long or severe. The main causes will be rapidly rising interest rates by the central banks in the G7 countries intended to reduce inflation by a) curbing wage growth and increasing unemployment rates, and b) pushing up borrowing costs thereby crippling household budgets and reducing the demand for goods. There is no indication the U.S. Federal Reserve or the Bank of Canada and other central banks will ease up until there are clear indications that the rate of inflation is moving toward the 2% target.
Looking ahead: At the end of a recession, expected by early 2024, the Bank of Canada would be expected to reduce overnight rates to spur the general economy, and this will have a dramatic effect on real estate market activity due to pent-up buyer demand, falling interest rates, massive immigration in Canada which will increase demand for housing, and a severe undersupply of housing stock.
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