The BoC must stop sugar-coating, admit Canada has a higher recession risk than others: Economist
The Bank of Canada hiked its benchmark overnight rate by 75 basis points to 3.25 per cent on Wednesday.
In a press release, the central bank said, “The effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine continue to dampen growth and boost prices.”
Jimmy Jean, chief economist and strategist at Desjardins, said he thinks the Bank of Canada needs to “stop sugar coating” the risk of a recession.
“I'm going to be looking to how honest the central bank is with Canadians as to what they can expect. We have the second highest private sector debt to GDP in the world so certainly our economy is more sensitive than many others to those interest rate increases,” Jean said in an interview Wednesday.
“I think it's time for the Bank of Canada to stop sugar coating things and admit that we're at elevated risk for a recession, and we do expect a recession, although a mild one, early in 2023.”
The central bank has two interest rate announcements scheduled before the end of the year, with the next decision set for October 26.
Stephen Brown, senior Canada economist at Capital Economics, said after Wednesday's hike, he expects to see a smaller rate increase next month.
“The Bank of Canada remains concerned about the risk of high inflation expectations becoming entrenched, but with the economy now slowing sharply and inflation easing by more than the Bank expected, we still see scope for it to follow today’s 75 bp hike with a smaller 25 bp move in October,” Brown said in a note to clients Wednesday.
‘WILL NEED TO RISE FURTHER’
In the Bank of Canada’s release, it said “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further.”
Josh Nye, senior economist at RBC Economics, said this statement signalled the BoC pushing “back against calls for a pause after today’s hike.”
“That said, it hinted that the pace of rate hikes will slow going forward as it assess the impact of tightening thus far. Our forecast assumes one more 25 bp increase in October, though today’s meeting suggests upside risk to our call for the overnight rate to peak at 3.50 per cent,” Nye said in a note to clients Wednesday.
Benjamin Reitzes, managing director, Canadian rates and macro strategist at BMO Capital Markets, said the Bank of Canada’s tone in the statement shows it’s still “very concerned” about rising inflation.
“That leaves little doubt that further rate hikes are coming; the only question is how big will the next move be?” Reitzes said in a note to clients Wednesday.
“The door is wide open to allow the data to guide the next decision, but at this point, the tone of the statement remains very concerned about inflation.”
Warren Lovely, chief rates strategist at National Bank of Canada, said there needs to be an “adult conversation” about getting inflation under control.
“The Bank of Canada, and I think to be clear, other central banks appear to be willing to sacrifice some economic activity to get inflation under control. Jay Powell and the U.S. Federal Reserve Board just talked about economic pain and I think the same analogy may be applied here,” Lovely said in an interview Wednesday.
“When you're in excess demand, when you have labour markets this tight, when inflation is this strong, getting it under control is going to require some painful medicine. We've taken quite a few doses already. I think there's still perhaps another dose to come.”