The study showed that in the last 60 years the central bank managed to reduce inflation by 5.7% on three occasions by rapidly raising interest rates and each occasion was followed by a recession. The think tank said that if the central bank intends to reduce inflation from 7.7% to its 2% target by quickly raising interest rates, it could cause significant “collateral damage”, including 850,000 job losses, and is calling for a new policy inflation targeting to reduce this risk. Jennifer Lee, senior economist at BMO Capital Markets, who expects a 0.75 percentage point rate hike from the Bank of Canada this month, said quick and aggressive hikes would “definitely” cause a significant slowdown in economic growth. “Whether it’s going to be an official recession or not remains to be seen, but clearly a significant slowdown,” he said. He also said there are few alternatives available to the central bank at the moment to tackle inflation. “We need rate hikes right now – bigger ones – to kill this inflation monster sooner rather than later,” he said. David Doyle, chief economist at Macquarie Group, who also expects growth of 0.75 percentage points, sees a recession in 2023 in both 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 layoffs in some sectors, such as technology. Statistics Canada said last week it expected to report a 0.2% contraction in GDP for the month of May amid weakness in the resources, manufacturing and construction sectors. In its study, the CCPA said the Bank of Canada could potentially reduce the risk of tipping the economy into recession by adjusting its inflation target to 4%. The study highlighted how the bank has successfully avoided a recession when it aimed for smaller reductions in inflation, allowing the bank to deliver smaller rate hikes over a longer period of time. However, Doyle said 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,” he said. “It would also increase the risk of a severe downside scenario where there is a unwinding of consumer and business inflation expectations.” The CCPA study comes a day after the Bank of Canada released two quarterly surveys that revealed consumers and businesses expect inflation to remain high for several years, further increasing the odds of a 0.75 percentage point rate hike this month. Speaking to reporters at an event in Brampton, Ont. On Tuesday, Deputy Prime Minister Chrystia Freeland was asked about the CCPA study and said the Bank of Canada is well equipped to handle the inflation problem. “He has the tools and he has the know-how to (reduce inflation). And I think we all have to have confidence that the Bank of Canada is going to do its job,” he said. As for how long it might take to reach even the central bank’s two percent inflation target, BMO’s Lee said we would likely see inflation of 3 percent by the end of 2023, with two percent more in 2024 or in 2025. Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox morning or night. Sign up today.
