Watch: the Bank of Canada set to raise interest rates

Watch: the Bank of Canada set to raise interest rates

As early as this week, the Bank of Canada will launch a campaign of tighter monetary policy that will test the country's debt-laden consumers and reveal whether the country's robust economic recovery has staying power. We apologize, but this video didn't load.

You can see other videos from our team by tapping here. Try refreshing your browser, or The country has one of the highest total debt burdens in the developed world, ranking slightly behind France and well ahead of the U.S. Markets are betting that the Bank of Canada will be the most aggressive Group of Seven in lifting rates. Economists and traders think a string of hikes will start on January 26 until the policy rate is back to pre-pandemic levels of 1.75 per cent in about a year. The Bank of Nova Scotia is forecasting it will climb as high as two per cent. The best case is that higher rates don't cause a major economic slowdown but are still potent enough to cool inflation. Consumer prices went up at the fastest pace in 30 years last month.

The potential for policy error has increased along with inflation. Central bank officials led by Governor Tiff Macklem will worry that if they move too fast, they will destabilize an economy that has one of the most expensive real-estate markets in the world. They know that if they balk, they could lose control of consumer prices and squander credibility that took three decades to build. Prime Minister Justin Trudeau is nearly as tough as it is for him. It is getting harder for him to justify budget deficits. Pressured to help Canadians with the rising cost of living could escalate demands for government help. Fiscal expansionism was at the centre of the prime minister's agenda for six years and was a big part of his re-election campaign in 2021.

Robert Asselin, a former Trudeau adviser who is now vice-president of the Business Council of Canada, said by phone that we are entering the riskiest economic policy landscape we've seen in decades. We're entering the riskiest economic policy landscape we've seen in decades. In one way, the normalization of rates from record lows is a success story. It is an economy that has recouped its pandemic losses, is approaching full employment and running up against capacity. In 2021, the nation created 886,000 new jobs, a record year. After losing three million jobs at the start of the epidemic, employment is now 240,500 above what it was in February 2020. The U.S. employment is still more than three million less than that mark. Commodities have been doing well, helping to fuel national income. But analysts worry about the soundness of the recovery, which relies on a surge in housing and one of the largest fiscal expansions and increases in central bank balance sheets.

Home prices have gone up 41 per cent since policy makers slashed interest rates to the emergency lows in March 2020. Private and public debt outside of the financial sector has gone up by more than $1 trillion to $8.1 trillion through June of last year. That represents about 345 per cent of gross domestic product, the sixth highest among the more than 40 rich economies tracked by the Bank for International Settlements. How will the economy react to higher borrowing costs? Benjamin Reitzes, macro strategist at Bank of Montreal, said by phone: "I don't think you want to turn the screws too much on housing. There is a risk there and you want to make sure that market stays stable. Others believe that the central bank is behind the curve with limited options. A gradual approach may not slow inflation if price pressures have increased, forcing even more aggressive tightening down the line. Derek Holt, an economist at Scotiabank, said Thursday in a report to investors that we can't guarantee a soft landing, but decisions made by the Bank of Canada will go a long way toward determining whether we stand a chance. Canada is at a fork in the road. During the outbreak, he and Finance Minister Chrystia Freeland tried to keep the economy flush with cash, while proposing an expansive social policy and climate-change agenda.

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Trudeau gives little indication he plans to pare back spending after a news conference Wednesday when he leaves pigs stranded on the other side of the Canadian U.S. border. The prime minister told reporters he would have Canadians backs as promised in the very beginning of the epidemic, because he said that we are going to continue to work to bring down costs for families on housing, childcare, and in a range of things. Without trimming his fiscal plans, Trudeau will cause inflation that could cause the Bank of Canada to raise borrowing costs by even more. That would leave the nation's indebted households to pay the biggest price for the prime minister's ambitions. The challenge is to not let policy errors hurt the impressive recovery we have seen over the last few months, Asselin said.