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The Bank of Canada’s swift rate increases are likely to trigger a recession

Rate increases by the Bank of Canada are likely to trigger a recession

Key Takeaways:

  • The recession will likely follow the Bank of Canada’s strategy of promptly hiking its benchmark interest rate to counteract rising inflation (CCPA).
  • As per senior economist, Jennifer Lee at BMO Capital Markets, the Bank of Canada will likely increase interest rates this month by 0.75 percentage points.
  • Lowering the Bank of Canada’s target inflation rate to 4 percent, in the opinion of the CCPA, may reduce the likelihood that the economy will experience a recession.

As per a new analysis published on Tuesday by the Canadian Centre for Policy Alternatives, the Bank of Canada’s approach of swiftly raising its key interest rate to combat soaring inflation will probably result in a recession (CCPA).

According to the analysis, in the past 60 years, the central bank has only been able to reduce inflation by 5.7% in three instances by swiftly hiking interest rates. In each instance, a recession followed.

According to the research institute, if the central bank attempts to raise rates to reduce inflation from 7.7% to its target of 2% quickly, this could result in significant “collateral damage,” including the loss of 850,000 jobs. To mitigate this risk, the institute calls for new inflation targeting policy.

The Bank of Canada is anticipated to raise interest rates by 0.75 percentage points this month, according to senior economist Jennifer Lee at BMO Capital Markets. She predicted the economy would decelerate significantly due to the Bank of Canada’s quick and aggressive rate hikes.

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She added that whether it will be a formal recession is still up in the air, but there has been a noticeable slowdown.

She added that the central bank has few options for dealing with inflation.

Rate increases of a greater magnitude are required immediately to slay the inflation monster as soon as possible, she declared.

The head of economics at Macquarie Group, David Doyle, likewise anticipating a 0.75 percentage point increase, believes that Canada and the United States will have a recession in 2023.

Because of Canada’s more serious structural imbalances, including its high levels of consumer debt and housing investment, he said, “We expect the recession to be bigger in Canada.”

Canada’s economy is already slowing down, and certain industries, like technology, are even seeing layoffs.

In light of weakness in the resource, industrial, and construction sectors, Statistics Canada stated last week that it anticipates reporting a 0.2% GDP contraction for May.

According to the CCPA’s assessment, by lowering the Bank of Canada’s target inflation rate to 4%, there may be less chance of the economy entering a recession. The analysis showed how the bank could prevent a recession by aiming for lower inflation decreases, which allowed the bank to implement smaller rate rises over a longer period.

Rate increases by the Bank of Canada are likely to trigger a recession.
Rate increases by the Bank of Canada are likely to trigger a recession. Image from The Star

However, Doyle said it would be a “poor idea” to increase the inflation objective to 4%.

He claimed that doing so would increase uncertainty and harm the credibility and independence of the Bank of Canada. It would also create a severe downside scenario in which inflation expectations for businesses and consumers become unanchored.

The CCPA report was issued a day after the Bank of Canada released two quarterly surveys that suggested consumers and companies anticipate inflation to remain high for some time, boosting the likelihood that the interest rate will be raised by 0.75 percentage points this month.

When reporters asked about the CCPA study on Tuesday at an event in Brampton, Ontario, Deputy Prime Minister Chrystia Freeland responded that the Bank of Canada is well-equipped to deal with the inflation issue.

“It is equipped with the know-how and the resources to (bring down inflation). And I believe we should all have faith in the Bank of Canada to carry out its duties, “She said.

In response to the question of how long it may take to even meet the central bank’s two percent inflation objective, BMO’s Lee predicted that by the end of 2023, inflation will likely be at three percent, with two percent more possible in 2024 or 2025.

Source: CTV News

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