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Central bank “front load” interest rates will be raised by raising full percentage points
News analysis
Ottawa- Bank of Canada Is trying to remove excess demand from the economy, but contrary to what some economists believe, it can achieve a “soft landing” of avoiding a recession and returning inflation to the target of 2%. Says.
The central bank of Canada was the biggest temporary rate hike since 1998, so the market was surprised to raise the trend-setting interest rate by 100 basis points (full percentage points) to 2.5% on July 13. did. After that, a quarter percentage point was widely expected. US Federal Reserve System On June 15, we raised our federal funding target by 75 basis points.
“The Board has decided to move the path to higher interest rates ahead of schedule,” according to a BoC press release.
An important message from the central bank is that accelerating interest rate rises can avoid the great pain of having to raise interest rates further in the future.
“The landing tends to be weaker after a forward-looking tightening cycle,” Bank of Canada Governor Tiff McClem said in a press conference.
Macklem said that by targeting excessive demand, it was actually only accumulated “in the last few months” and that the BoC aims to give the supply side time to catch up. ..
“It was stronger today,” McClem added, adding that the “very rare” move of 100 basis points at a time reflects the exceptional situation of the Canadian economy.
inflation Is the highest in almost 40 years, at almost 8%, and the BoC says it will remain at that level for the next few months.
The BoC also suggested that prices need to be raised further.Already raised the price overnight 125 basis points This year, prior to the rate hike on July 13.
Evidence of skepticism
The Bank of Canada expects inflation to ease to about 3% by the end of 2023, before returning to the 2% target by the end of 2024.
McClem said he recognizes that BoC’s credibility has been tested for its ability to reach its 2% inflation target.
Vivek Dehejia, a professor of economics and philosophy at the University of Carlton, previously told The Epoch Times: [2 percent inflation] To ensure credibility, banks need to appear to be taking positive action. “
But while 50 basis points are too “cowardly,” he said hiking rates above 75 basis points are not a good idea.
Tony Stylo, director of Oxford Economics in Canada’s economy, said in a note on July 13 that raising 100 basis points was “overly aggressive” and another such rate hike was “Canada’s household debt. It can exacerbate housing imbalances and put the economy in recession. “
TD Securities said early comments suggest that there is less room for future rate hikes and expects to raise rates by at least 50 basis points in September.
“But we expect a sharp change in tone in the fourth quarter. At that point, growth is expected to slow under significantly tighter fiscal tensions. As a result, we were 3.25 in October. We will continue to look for the closing price of%, and interest rate cuts will continue in the second half of 2023, “TD Securities said in a memo.
The Bank of Canada predicts that the Canadian economy will grow 3.5% in 2022 and slow to 1.75% in 2023. this is, April forecast2022 growth is projected to be 4.25% and 2023 growth is projected to be 3.25%.
Growth forecasts for 2024 will rise by up to 2.5% when housing stabilizes and is no longer a drag on economic growth.
RBC is skeptical of Bank of Canada’s growth forecast.
“BoC’s forecasts are optimistic, and we believe that growth needs to slow further next year in order for domestic inflationary pressures to be curbed in a reasonable time frame. In our view. Achieving a soft landing is difficult, and our predictions are now, Mild recession “Next year,” RBC senior economist Joshnai said in a memo.
The RBC also expects the BoC’s policy rate to reach 3.25 percent in October. But Bay Street Bank said the 100 basis point move was not out of the question.
Macklem upheld his call to avoid a recession. Over 1 million jobsThere is room to reduce these vacancies without significantly increasing the unemployment rate, as it happens during a recession. He also pointed out that, unlike many trading partners, high commodity prices bring more income to Canada.
Stillo said in a July 6 note that soft landings are still the most likely result, with the exception of soft landing than the rules for central banks to aggressively raise interest rates. He pointed out seven recessions in the last 50 years, with the exception of the 2020 blockade recession, where gross domestic product (GDP) fell by an average of 2.5% over three-quarters.
Rising inflation expectations
In particular, central banks have expressed greater concern about rising inflation expectations based on central banks. Investigation The proportion of businesses and consumers shows that these groups expect inflation to last longer.
among them Monetary Policy Report (MPR)The central bank said these findings suggest greater uncertainty about the future path of inflation. The MPR showed how the distribution of inflation expectations expanded and shifted higher compared to the situation in April.
“People are looking at what’s happening, and obviously it affects the way people see future inflation, so expectations aren’t fixed. And it’s really, really big, It’s a big problem, “said Dehezia.
Canada is a medium-sized open economy, importing inflation from external sources through channels such as energy and food prices, and the BoC shows how the Ukrainian conflict has had a devastating impact on supply chains and costs. I’m emphasizing.
“Higher interest rates do little to deal with these factors, and may exacerbate them,” Stylo said.
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Rahul Vaidyanath is a journalist in The Epoch Times of Ottawa. His areas of expertise include economics, financial markets, China, and defense and security. He has worked at the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York and Los Angeles.
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