Global central banks are aggressively pursuing higher interest rates to cool inflation. It might cool inflation, but it’s too late for a soft landing, according to RBC Economics. Only one global central bank is currently forecasting a recession, but RBC is forecasting a hard landing as early as the end of this year, Canada included.
Canada’s Central Bank Has Been Aggressively Hiking Interest Rates
The Bank of Canada (BoC) has been on an aggressive rate hike path. Earlier this month, they hiked interest rates 75 basis points (bps) higher, bringing the overnight rate to 3.25% — the highest since the Great Recession. RBC noted this is above the 2-3% range the BoC considers to be neutral. Central banks around the world are on a similarly aggressive path to try and curb inflation.
“There’s more to come from each of these central banks as they blow past ‘neutral’ into ‘restrictive’ territory, tapping the brakes on demand in an effort to keep an inflationary spiral from developing,” explained RBC.
Canada’s Economy Will See A Hard Landing
RBC economists don’t see this ending as smoothly as BIS research has suggested. “… policymakers pledging to do what it takes to rein in inflation, we think a soft landing is becoming a distant prospect.”
Despite the rough setup, only one major central bank has forecast a recession so far. RBC doesn’t see that, instead expecting Canada, the US, and UK to see an economic contraction in the coming months, or early 2023.
“Despite its rosy GDP forecast, the BoC has acknowledged a soft landing will be difficult to achieve. With the BoC now expected to take monetary policy even further into restrictive territory, we’re even more convinced of that,” said RBC.
Don’t get too excited about this recession boosting home prices like the last one. High inflation means the central bank will have limited ability to use credit stimulus. As a result, RBC has previously stated they expect Canada’s housing correction to be the worst in history.
So what are you implying? A total collapse of the economy? With high unemployment? Inflation to keep increasing?
Unemployment will follow higher rates. People borrow less when it’s expensive, including businesses that need to service Dept. When people don’t spend, demand for everything goes down. As money stops moving around due to lower demand, inflation slows down. Converse to what we recently saw with QE and low rates.
Canada’s economy has been heavily dependent on housing for a number of years now. Higher interest rates >>> softening of the housing market >>> hard landing for at least some parts of the high-flying real estate sector. BOC has seemed very hesitant to raise interest rates, perhaps (at least partly) out of a fear of deflating the housing bubble. [?]
I agree. The low interest rate for ‘stimulus’ has led to low ROI for the small saver, who sees home ownership as his ONLY vehicle for a high enough rate of return to retire. The mutual funds 2% does little to accumulate savings since inflation reduces real growth to zero. The wealthy have the leverage to demand 12% to 50% ROI and they profit from cheap money. But it is risky for the consumer because home pricing cannot ‘bubble’ forever and some will get caught in the burst. As well, it drives up rental prices (linked by cost of buildings) beyond the affordability of the lower 50% of income earners and that drives a host of other problems.
this implies a very grim future
I would agree that a recession (mild to moderate) is inevitable now. The front loading may have avoided a major collapse but the correction is also front loaded to the consumer who cannot adjust quickly which makes it a bit of a ‘tough love’ policy.
One problem is that the minimum wage/working poor have been so drained by the profits of the superrich that they are unable to handle the shock. This was a long time coming from the policy of keeping interest rates low (thus making it easy to borrow/expand and hard to save) which served the interests only of the wealthy and politicians. The long term consequences are now upon us, triggered by the panedemic but it really could have been anything. The longer it goes on, the smaller the trigger has to be. See the period BEFORE the ‘Great Depression’. Current policy is a bit better but may need to have a ‘floor’ to interest rates so as to prevent such ‘up and down’ cycles and make saving (capital accumulation) more viable for the average consumer.