Canada Mortgage and Housing Corp. (CMHC), the national housing agency, forecasts that
rising interest rates will push the country into a recession by year’s end.
If, as expected, the Bank of Canada raises its benchmark interest rate to 3.5% to slow inflation,
the economy would experience two consecutive quarters of negative economic growth, which is
the technical definition of a recession.
CMHC chief economist Bob Dugan outlined the case for a recession in Canada in a blog post.
He said a recession would cause Canada’s average home price to decline 5% from its 2022
peak by the middle of next year. Home sales would likely fall by 34%, according to Dugan’s
calculations.
CMHC developed two models that examine the impact of higher interest rates on the Canadian
economy. The other scenario assumes the central bank would only raise its key interest rate to
2.5%, a situation that would allow Canada’s economy to continue growing at a slower pace.
Inflation running at a four-decade high has led the Bank of Canada to undertake an aggressive
campaign to hike borrowing costs, raising its benchmark rate to 1.5% from 0.25% four months
ago, with another rate hike expected this week.
The market is forecasting that the Bank of Canada will increase its trendsetting interest rate by
three quarters of a percentage point at its meeting on July 13, bringing it to 2.25%, and then hit
3.5% by the end of this year, according to Refinitiv data. Those levels fit with the higher-rate
scenario put forward by CMHC that would lead to a recession.