The Bank of Canada’s strategy of rapidly raising its key interest rate in an effort to combat accelerating inflation will likely trigger a recession, concludes a new study by the Canadian Center for Policy Alternatives (CCPA).
According to the study, the central bank has had a 0% success rate with this approach for the past 60 years. During this period, annual inflation fell by 5.7 percentage points on three occasions, each time after sharp interest rate hikes and a recession, the analysis pointed out.
The research institute notes that the central bank’s operation to bring inflation down from 7.7% to its 2% target by rapidly raising rates could lead to significant “collateral damage”, including the loss of 850,000 jobs. He further calls on the central bank to adopt a new policy on inflation to reduce this risk.
According to economist Jennifer Lee of BMO Capital Markets, the rapid and aggressive increases will “certainly” lead to a significant slowdown in economic growth. “Whether or not this is an official recession remains to be seen, but clearly it will be a significant downturn,” she explained. She also noted that the central bank currently has few options to fight inflation.
David Doyle, head of economics for the Macquarie Group, predicts a recession in 2023 in Canada and the United States. “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.
Last week, Statistics Canada said it expected to report a 0.2% contraction in GDP for the month of May, amid weakness in the resource, manufacturing and construction sectors.
In its study, the CCPA indicated that the Bank of Canada could 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 aiming for smaller cuts in inflation, which in the past allowed it to introduce smaller rate increases over longer periods.
However, Doyle added that raising the inflation target to 4% would be a “bad idea”. “It would damage the credibility and independence of the Bank of Canada and create more uncertainty. It would also increase the risk of a severe downside scenario, where there would be an unanchoring of consumer and business inflation expectations. »