The Bank of Canada’s aggressive interest rate increases have positioned it squarely between a rock and a hard place..The rock is spiraling inflation. The hard place is a recession..Increasing interest rates will not control price increases across the board, David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, told Canadian Mortgage Professional.. “One of the big problems in attempting to control inflation with interest rates is that some of the big drivers of inflation having nothing to do with what’s happening in Canada, and so the interest rates are going to have little effect on them,” said Macdonald..“The rising price of gas in particular, which is determined largely by international markets, and the rising price of food are not going to be brought down just because interest rates are higher.”.To date, higher rates have had the intended effect of cooling housing markets across the country, but little effect in other areas..“The real challenge the bank has is they’re using a very blunt instrument to attempt to bring prices down in areas that are not interest rate-sensitive,” said Macdonald. “What that may mean is that we don’t end up with a soft landing, but with a recession.”.A recent poll of economists by Bloomberg uncovered a mood of pessimism..The odds of a recession are now “too high for comfort,” said Doug Porter, chief economist at BMO Capital Markets..“We rank the odds of recession as being less than 50/50 over the next year, but it will be a close call,” said Porter..“The fact is that we are likely looking at a cumulative rate hike of 300 basis points, or a bit more, in North America, and that is a very serious amount of tightening in a single year, which at the very least will cut growth close to zero.”.David Doyle, North American economist and Canadian market strategist at Macquarie Group, was much more the pessimist, saying he forecasts roughly 70% odds of recession, fuelled by “extreme levels” of household debt and residential investment, in addition to the economy’s lack of growth drivers aside from housing..“Our baseline is for a recession in 2023,” said Doyle. “We forecast Canada being more severely impacted than other developed economies, such as the US.”.Canada is close to the tipping point from plunging into a recession by the first half of 2023, said Avery Shenfeld, chief economist at CIBC Capital Markets..“Excessive rate hikes in either the US or Canada could tip us into an outright downturn. A further shock to world food and energy prices would make it extremely difficult for central banks to contain inflation expectations while keeping the economy growing,” said Shenfeld..Not all the economists polled are calling for high odds for a recession..Stephen Brown, of Capital Economics, feels the odds of a recession in the next 12 months are about 25%..“That said, we should also acknowledge that the Canadian economy is enjoying a sizeable tailwind from higher commodity prices, which should support GDP growth over the next few quarters,” said Brown. “The extent to how deep the recession could be will depend on how much house prices fall.”.The most optimistic appears to be Jean-Francois Perrault, senior vice-president and chief economist at Scotiabank, who said he doesn’t believe a recession is coming..“There is still lots of pent-up demand, balance sheets remain strong, commodity prices are reasonably high and job vacancies are at record levels. That provides a cushion to the blow to spending that inflation and interest rates are causing,” said Perrault..Despite the sensitive balancing act, most economists and other market watchers agree the bank will announce another so-called oversized rate hike on July 13..Dominion Lending Centres chief economist, Dr. Sherry Cooper, says “persistent levels of inflation mean the central bank will undoubtedly introduce a three-quarter-point increase then.”.The door to such an unusually high increase was opened by the US Federal Reserve, which hiked its own benchmark rate by .75% in mid-June in a bid to curb inflation..Canada’s economy is still performing well in the face of inflation, with unemployment hitting 5.1%, the lowest level since comparable data became available in 1976. .Macdonald feels the only prospect of a significant economic downturn is dependent on what the bank decides to do..“There are some segments of the consumer price index that will absolutely come out with higher interest rates. But the other parts — it’s going to be hard to bring them down without a recession. I think that’s the real danger we’re in,” he said..“We’re not going to be in a recession, except if the bank causes one by increasing interest rates too quickly.”
