Governor tiff macklem defended an astonishing leap in of bank of canada bottom sign Rate of interest on Wednesday with the argument that “front-loaded” rate hikes are more likely to offset the slowdown.
But he also clarified that the central bank is willing to go as far as it wants to “stop excess demand” from the Canadian economy and bring prices back to normal levels.
even if he dunks Canada lightly recessionIt will probably be worth the short term pain in the massive inflationAccording to economists who spoke to Global News.
Bank of Canada move Increase interest rates by 100 basis points to 2.5 percent Wednesday came as a shock to many economists and market watchers, with most rising three-quarters of a percent.
Macklem, speaking to reporters on Wednesday, acknowledged there may be some setbacks to break from consensus estimates, calling the growth “very unusual”, but added that the economic conditions facing central bank policymakers are also.
Inflation, which was recorded at 7.7 per cent in May, is running higher than previously forecast and is widening. Domestic pressures are now contributing to price increases, driven mostly by global factors such as the war in Ukraine and supply chain disturbances.
Canada’s economy is running very hot, or in economic colloquial, it is “excess demand”.
Macklem said a tight labor market with wages is likely to eventually fuel inflation, which the central bank now expects to average eight percent for the third quarter of the year.
Canada’s economy needs to contract, he argued, to bring inflation back down to the bank’s one to three percent target range. Doing so will give the supply delay time to meet the fervent demand pushing up the prices.
With an increase of 100 basis points, Macklem said his message to Canadians is that high inflation is “not here to stay”, but he cautioned that the road to the “forecast” would be bumpy.
“It is going to take some time to bring inflation back down to our target of 2 per cent,” he said.
“It’s not going to happen without some pain.”
Will Bank of Canada risk a recession?
Demand for a possible slowdown next year has begun in recent months.
Macklem admitted to reporters on Wednesday that the path to a “soft landing” – an economic contraction that precipitates a formal recession – has been “narrowing” and that “strong action” is needed to bring inflation under control.
Policymakers at the Bank of Canada indicated on Wednesday that interest rates will continue to rise in the coming months.
RBC senior economist Josh Nye told Global News this week that the bank will likely hike rates after July.
“I think they will continue to be in favor of acting more firmly and keeping inflation under check, even if it means a greater risk of recession,” he said.
Nye projected rates after Wednesday’s increase to 3.25 percent by October.
This would put the bank’s key interest rate above the so-called neutral range of one to three percent and into restrictive territory – the point at which the Bank of Canada believes its policy rate will actively influence economic growth.
Royal Bank of Canada was the first major bank in the country predict an economic contraction On the horizon last week with a report that called for a “moderate” but “short-term” recession in 2023.
RSM Canada economist Tu Nguyen said in a statement on Wednesday that he agreed the Bank of Canada would have to induce a “recession” to see price stability return, but that an “economy-wide recession is still impossible” in 2022.
She predicted that the housing sector, which has already slowed due to interest rate vulnerability, would see a decline, but pointed to a “still healthy economy” through other indicators such as business activity and labor market balances. We do. The year.
Derek Holt, vice president of Scotiabank Capital Markets Economics, told Global News on Tuesday that although the bank doesn’t currently have a recession forecast, he doesn’t think the rumble of contraction will deter the Bank of Canada at its present. rate increase cycle.
“I don’t think it will upset the Bank of Canada. I think they probably see it as a necessary condition for the economy to cool down to give it a chance to ease inflationary pressures,” he said on Tuesday. Said in an interview.
Is recession the worst case scenario?
Deloitte Canada’s chief economist, Craig Alexander, told Global News this week that a recession may not be the worst outcome from a central bank’s point of view.
“I don’t think the Bank of Canada wants to cause a recession, but I do think the Bank of Canada is ready for one if inflation needs to be addressed,” he said Tuesday, echoing Holt.
Alexander said Canadians should not be “unnecessarily frightened” by the recession, which, if passed, would only last two or three quarters.
A recession would be a quick way to bring inflation back down, he argued, as consumers significantly reduced their spending and businesses cut prices to move unsold inventory.
Alexander said he expects the Bank of Canada to halt its rate hike cycle sometime in the fall and to that point assess the impact of its hike and the state of global inflationary pressures.
“It’s going to be very difficult because it’s more art than science, right? They don’t know what the right interest rate level is that’s going to cool the economy, but doesn’t cause a recession,” he said.
Barber and Holt both agreed with Alexander that a recession is not the worst outcome for the Bank of Canada.
Nye said keeping inflation under control – recession or not – should be a “number-one priority” for the central bank.
“I think the worst risk right now is to allow inflation to spiral out of control,” Holt said.
“This is something that can be more harmful, if over time, than higher interest rates, because it means that instead of paying more on your mortgage interest payments and consumer loan payments, you are paying more for what you consume. They are paying more on everything, which dominates the household budget.”
Macklem told reporters on Wednesday that Canadians could be at risk of economic pain if the country plunges into a “wage-price spiral.”
In this example, Canadians would continue to increase inflation as workers bid up their wages to keep pace with price increases, only for businesses to pass on higher prices to consumers to offset the increased costs.
“If that happens, the economy will have to slow down at a much faster rate to bring inflation back to its target,” Macklem said.
The way to cut the wage-price spiral is to keep inflation expectations under check – and Macklem said on Wednesday that central banks are prepared to take aggressive, even surprise hikes, to tame inflation in the long run. Is.
“By stepping up our response, we’re really doing everything we can to avoid that risk,” he said.
The Bank of Canada’s next interest rate decision will be announced on September 7.
© 2022 Global News, a division of Corus Entertainment Inc.