According to a new study by the Canadian Center for Policy Alternatives (CCPA), the Bank of Canada’s strategy of rapidly raising its key interest rate in an effort to combat soaring inflation will likely trigger a recession.
The research institute says that if the central bank aims to bring inflation back from 7.7% to its 2% target by rapidly raising rates, it could cause significant “collateral damage”, including 850,000 losses of jobs.
He adds that the central bank has had a zero percent success rate with this approach, noting that a 5.7 percent drop in the inflation rate has occurred three times in the past 60 years, each times after sharp rate hikes and accompanied by a recession. .
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The CCPA is calling for a new policy on inflation targeting to reduce this risk.
Jennifer Lee, senior economist at BMO Capital Markets, who expects a 0.75 percentage point increase in interest rates from the Bank of Canada this month, said the rapid and aggressive hikes will lead “to for sure” a significant slowdown in economic growth.
“Whether or not this is an official recession remains to be seen, but clearly a significant downturn,” she said.
She also said the central bank currently has few alternatives to fight inflation.
“Rate hikes are needed right now – big ones – to kill this inflation monster as soon as possible,” she said.
Economy can withstand further interest rate hikes, says Bank of Canada Governor
David Doyle, head of economics at Macquarie Group, who also expects a 0.75 percentage point rise, predicts a recession in 2023 in Canada and the United States.
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“We expect the contraction to be larger in Canada because of its more severe structural imbalances, such as housing investment and consumer debt levels,” he said.
Canada is already experiencing slowing economic growth and even seeing layoffs in some sectors, such as technology.
Statistics Canada said last week that it expected to report a 0.2% GDP contraction for the month of May amid weakness in the resource, manufacturing and construction sectors.
In its study, the CCPA said the Bank of Canada could potentially reduce the risk of sending the economy into recession by adjusting its target inflation rate to 4%. The study highlighted how the bank managed to avoid a recession when it aimed for smaller cuts in inflation, which allowed it to introduce smaller rate increases over a longer period. .
However, Doyle said raising the inflation target to 4% would be a “bad idea”.
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“It would damage the credibility and independence of the Bank of Canada and create more uncertainty,” he said. “It would also increase the risk of a severe downside scenario, where there would be an unanchoring of consumer and business inflation expectations.”
The CCPA study comes a day after the Bank of Canada released two quarterly surveys that found consumers and businesses expect inflation to remain high for several years, further raising the odds of a interest rate hike of 0.75 percentage points this month.
As for how long it would take to reach the central bank’s 2% inflation target, BMO’s Lee said we’re likely to see 3% inflation by the end of 2023, with 2% more. in 2024 or 2025.
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