Canadian Interest Rates Started To Rise At This Rate of Unemployment Last Cycle: BMO

Still think the Canadian economy isn’t ready for a rate hike? A new analysis from BMO helps to make a convincing argument otherwise. The Bank of Canada (BoC) last hiked the overnight rate when unemployment fell to the current rate. That was back in 2017, when the country’s interest rates were also double the current level. Combine this with elevated inflation, and it’s a strong argument rates will rise soon.

Canadian Unemployment Was At This Level Last Time Rates Climbed

As mentioned last week, Canadian employment improved last month. The seasonally adjusted unemployment rate fell to 6.7% in October, down 0.2 points from a month before. This is now a 20 month low and within spitting distance of February 2020 data, before the pandemic. The last time it was at this level, the overnight rate was 7x the current rate.

Unemployment Was At A Similar Level Last Time Interest Rates Climbed

Last cycle, interest rates climbed when the unemployment rate fell near this level. “Note that, in the previous cycle, the jobless rate came down to the mid-to-high-6% range in early 2017, writes BMO economist Shelly Kaushik. “And, the BoC started hiking rates soon after-starting in July of that year, to be exact.” 

Canadian Interest Rates Started Much Higher

During the last business cycle interest rates were raised with much less stimulus. “… the central bank was working with a higher starting point then-the target for the overnight rate was at 0.5% at the time, compared to its current 0.25%, she said. The bank has forecast the first rate hike will start in mid-2022, right around that time.

Inflation is much higher, unemployment is at a similar level, and real GDP has nearly recovered. Yet they’ve only just ended quantitative ease (QE) and the overnight rate is a full rate hike lower. Good thing they would never milk a crisis for cheap economic growth, because that’s what it looks like.