Bank of Canada rate hikes likely to trigger recession, experts say

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Economists are increasingly concerned that the Bank of Canada’s aggressive campaign to raise interest rates could push the economy into a recession.

On Monday, RBC’s economics arm warned clients that a soft landing in the economy – where the Bank of Canada raises interest rates and cuts inflation without causing an economic downturn – is becoming « more and more unlikely ».

« With policymakers pledging to do what it takes to contain inflation, we believe a soft landing is becoming a distant prospect, » said RBC chief economist Josh Nye.

« Central banks are aware of the challenge, but only the (Bank of England) has been bold enough to predict a recession. »

Since March, the central bank has embarked on a campaign to curb runaway inflation by raising the cost of borrowing for consumers and businesses. The bank’s economists have taken a so-called « forward » approach to raising rates, where they raise rates at a faster pace in a shorter period of time to encourage consumers to slow down their spending habits.

The central bank’s fear — and shared by several independent economists — is that inflation, if left unchecked, will become a permanent feature of the Canadian economy, a self-fulfilling prophecy where consumers and businesses raise prices because they expect costs to continue to rise.

The first rate hike took place in March, followed by four more over the summer, including the last hike in September, which took the bank’s key rate to 3.25%. Investors are betting that more rate hikes are on the way and that the headline rate will hit 3.75% before the end of the year.

Announcing the latest rate hike, Bank of Canada Governor Tiff Macklem warned that « given the outlook for inflation, the Governing Council still believes that the policy interest rate will still need to increase ».

But in recent speeches, even the central bank has warned Canadians that the hikes could cause economic hardship. More recently, its senior deputy governor, Carolyn Rogers, said in a speech in Calgary that there will be “bumps” in the road as Canadian consumers adjust to higher borrowing costs.

Following those increases, which helped slow the pace of inflation to 7.6% in August, Canada is expected to see the onset of a recession later this year or in the first half of 2023, Nye said. .

Economists generally define a recession as a period of temporary economic decline measured by two consecutive quarters of declining GDP. These months can be painful for many as businesses are likely to cut jobs and consumers struggle to afford basic necessities.

But Nye also argues that the rate hikes were necessary to control inflation — an even greater threat than a recession, he said.

« As some of the global drivers of inflation – oil and non-energy commodity prices, supply chain pressures and shipping costs – ease, domestic price pressures and Elevated inflation expectations continue to make ‘tight’ monetary policy the preferred path for central banks, » he said.

In a July study, the Canadian Center for Policy Alternatives found that the central bank has a “zero percent success rate” in raising interest rates quickly without causing a recession.

“There is simply no historical precedent for the Bank of Canada to engineer a ‘soft landing’. Every time the Bank of Canada has attempted such engineering through rapid interest rate hikes – which it seems to want to do now – it has resulted in a hard landing,” said CCPA senior economist David Macdonald. .

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