September 16, 2022

Market Trends

RYPM

Global central banks are aggressively pursuing higher interest rates to cool inflation. It might cool inflation, but it’s too late for a soft landing, according to RBC Economics. Only one global central bank is currently forecasting a recession, but RBC is forecasting a hard landing as early as the end of this year, Canada included.

Canada’s Central Bank Has Been Aggressively Hiking Interest Rates

The Bank of Canada (BoC) has been on an aggressive rate hike path. Earlier this month, they hiked interest rates 75 basis points (bps) higher, bringing the overnight rate to 3.25% — the highest since the Great Recession. RBC noted this is above the 2-3% range the BoC considers to be neutral. Central banks around the world are on a similarly aggressive path to try and curb inflation. 

“There’s more to come from each of these central banks as they blow past ‘neutral’ into ‘restrictive’ territory, tapping the brakes on demand in an effort to keep an inflationary spiral from developing,” explained RBC. 

Canada’s Economy Will See A Hard Landing

RBC economists don’t see this ending as smoothly as BIS research has suggested. “… policymakers pledging to do what it takes to rein in inflation, we think a soft landing is becoming a distant prospect.” 

Despite the rough setup, only one major central bank has forecast a recession so far. RBC doesn’t see that, instead expecting Canada, the US, and UK to see an economic contraction in the coming months, or early 2023.

“Despite its rosy GDP forecast, the BoC has acknowledged a soft landing will be difficult to achieve. With the BoC now expected to take monetary policy even further into restrictive territory, we’re even more convinced of that,” said RBC. 

Don’t get too excited about this recession boosting home prices like the last one. High inflation means the central bank will have limited ability to use credit stimulus. As a result, RBC has previously stated they expect Canada’s housing correction to be the worst in history

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