Forget about rate cuts for “a very long time” because rates will continue to rise, warns Jean Boivin, former Deputy Governor of the Bank of Canada.
Now managing director of the BlackRock Investment Institute, Jean Boivin issued several warnings Thursday when he delivered a speech during an event organized Thursday by the CFA Montreal organization downtown.
In front of more than 500 businessmen and women gathered for the occasion, Jean Boivin affirmed that “the recession is the cure for this disease of inflation”.
“We see a turning point in inflation. It’s positive,” he said. But you have to learn to deal with inflation, warns the man who has already represented Canada at the G7 and G20. “Going from 9% to 6% and from 6% to 4% will be relatively easy. »
Going from 4% to 2% will, however, be another matter, according to him.
There won’t be a direct line to 2%, he says. “There will be a lot more to do. And it’s not in line with what we see in the market. »
From a central banker’s perspective, what he was in a previous job, “between generating a recession to bring the inflation rate down to 2% or risk losing control of inflation and my credibility, it’s ‘is a no brainer. The central bankers will choose the recession”.
The Fed’s key rate will not peak soon, thinks Jean Boivin. He therefore does not believe in the start of monetary easing this year. To believe in such an eventuality seems to him “incoherent”.
Rate hikes are not over
He believes that the markets are probably underestimating the persistence of inflation again. “It will ease gradually, but it will remain above market expectations and central bank targets. »
And just because there will be a recession doesn’t mean central banks will be able to respond to it, he adds.
PHOTO ANDRÉ PICHETTE, LA PRESSE ARCHIVES
Jean Boivin is now managing director of the BlackRock Investment Institute.
It is not because we increase the rates that the prices decide to fall on their own. The reason rates drive inflation down is through a slowdown in economic activity.
Jean Boivin, CEO of the BlackRock Investment Institute
The Fed will therefore continue to raise rates, he says. “It’s not over,” said Jean Boivin of the increases.
He expects a break eventually later this year. But he insists it will be a pause and not the start of an easing cycle. “Central bankers won’t be able to easing for a very long time. Forget about rate cuts for a very long time. »
Jean Boivin believes that we should expect to go through a recession where inflation will be above the central bankers’ target, “a situation that we have not seen for 40 years”, he underlines .
Also a panelist at the event organized Thursday noon, the vice-president, chief economist and strategist at Desjardins Group, Jimmy Jean, is a little more encouraging. The Bank of Canada will be ready at the end of the year to begin a process of monetary normalization “with moderation”, according to its base scenario.
He nevertheless still advocates a defensive posture even if the stock markets are no longer overvalued. “They’re not a bargain though,” he says, looking at price-earnings ratios.
Noting in passing that economists tend to underestimate the extent of a recession, Jimmy Jean points out that corporate profit expectations remain rather optimistic when the economy could already be in recession. Investors are showing complacency, he said. In his view, the picture will get worse this year before it gets better. “It will be better in 2024,” he concludes.