Prominent Bay Street economist David Rosenberg said if the Bank of Canada is serious about tamping down runaway inflation through higher interest rates, the central bank will “kill the economy” at the same time.

“You got to understand if they're going to crush the inflation we're seeing, considering where the sources are, they're going to have to kill the economy,” said Rosenberg, president, chief economist and strategist at Rosenberg Research, in an interview Wednesday.

He argued most of the inflation that has emerged during the pandemic has stemmed from supply-side issues such as global supply chain disruptions, which is much harder to rectify with monetary policy compared to tackling inflation caused primarily by household consumption.

“If the central banks think that this is really demand-led inflation, which didn't come out of nowhere, it came out of the pandemic. And you could argue that, yes, the Russian invasion of Ukraine is going to aggravate the bottlenecks - you see what's happening in commodity markets. So what exactly is the Bank of Canada or the [U.S. Federal Reserve] going to do about the price of oil [or] the price of wheat?” he said.

“Of course, they're concerned about inflation expectations. But there's no getting out of jail free card here. This global supply curve of everything has become totally inelastic, which means that even small increases in demand can create the outsized inflation that we've seen.”

On Wednesday, the Bank of Canada hiked its overnight lending rate by 25 basis points to 0.50 per cent and signalled more rate hikes are on the horizon. It marked the first rate hike since 2018.

While the bank flagged the Russia-Ukraine conflict as a “major new source of uncertainty" in its statement, it cited recent strength in the Canadian economy, surging inflation and resilient household spending as reasons to hike rates.

Added Rosenberg: “They came and said that the economy is already operating at full capacity. There is no more spare capacity. They are very bullish on the economy.”

“I was actually astounded. Maybe they can be bullish on the Canadian economy, but I can tell you that the talk about how strong U.S. demand is going to be was just perplexing, almost laughable.”

Rosenberg said recent data has showed consumer spending in the U.S., consumer confidence indicators and intentions to buy durable goods have all slowed, leading him to think U.S. demand will not be as strong as the Bank of Canada believes it will be.

He also reiterated how the Canadian central bank - and the U.S. Federal Reserve, which is expected to kick off a rate-hiking cycle later this month - will both be raising rates at the risk of inverting the yield curve – which is a more reliable predictor of upcoming recessions than “any economist [he’s] ever met.”

Ultimately, the Bank of Canada will be guided by the economic data, Rosenberg said.

“That's why, I think, when all is said and done, you can’t ignore the economy. Even as [the bank] fights inflation, that's why I do think this is going to be a more truncated rate cycle than what's been discounted in the markets right now,” he added.