Interest Rates: How High is Too High?

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Last month, the Bank of Canada raised interest rates for the first time since 2018 – the first of what many anticipate will be a series of hikes. The Bank is attempting to curb inflation, but the challenge will be to curb inflation without destroying the economy and, in turn, the financial markets.

“When the U.S. Federal Reserve raises rates, it tends to overdo it,” says Frédéric Demers, Director and Investment Strategist at BMO Global Asset Management. This is what happened in 2006, after the Fed raised its key rate from 1.5% in June 2004 to 5.25% in June 2006,” says Yanick Desnoyers, Vice-President of Economics at Addenda Capital.

At that time, the real estate market began to fracture, the less-than-desirable financial products started to implode, the stock markets entered a period of unbridled volatility, and the economy ultimately fell into a recession. As early as September 2007, the Fed retreated, letting its key…

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