Soft landing ‘a remote possibility’ as prices rise: RBC

Consumer confidence in Canada looks ‘ugly’: Nick Nano

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RBC Economics warns that the possibility of a soft landing for the domestic economy is becoming “a remote possibility”.

In a note to clients on Monday, RBC Chief Economist Josh Nye said that so-called “front-loading” of rate increases – where policymakers increase borrowing rates in larger increments in the short term in order to shock consumer habits – does not guarantee that they will avoid driving the economy into a tailspin. stagnation.

“With policy makers pledging to do what it takes to rein in inflation, we believe a soft landing has become a distant possibility. Central banks recognize the challenge but only [Bank of England] He was bold enough to predict a recession.”

For our part, we believe that the European downturn has already begun with the worsening of the continental energy crisis. Canada, the US and the UK will likely see their own economic contractions starting later this year or 2023.”

The Bank of Canada has been dancing about the possibility of a soft landing in recent communications, with Carolyn Rogers, the Bank’s first deputy governor, saying in a speech in Calgary that there will be “bumps” in the road as Canadian consumers adjust to higher-cost borrowing.

The comments came on the heels of the central bank unleashing its fifth rate hike of the year, another massive increase of three-quarters of one percent. This raised the Bank of Canada’s key interest rate to 3.25 per cent, into what is known as the restricted area – where interest rates ultimately restrict economic activity – above the bank’s neutral range of 2-3 per cent.

The Bank of Canada is not expected to pause anytime soon. Markets are pricing in at least half a percent further rate increases before the central bank pauses, bringing the policy rate to 3.75 percent. Bank of Canada Governor Teff McClem noted that much, telling market watchers in his latest policy decision that “given the inflation outlook, the Governing Council continues to judge the policy rate needs to rise further.”

Although inflation is below its peak of 8.1 percent on an annual basis, it is still 7.6 percent, more than three times the bank’s 2 percent target.

High rates are already having a chilling effect on consumer spending, particularly in the mortgage market. Sales activity is down across the board, and both Bank of Nova Scotia and Desjardins expect prices to drop 23 percent from their February peak to the end of next year.

Economic production also slowed, with Statistics Canada forecasting a 0.1 percent decline in July after a disappointing reading in the second quarter.

For his part, Nye said interest rate increases were the price to pay for restoring very high inflation figures.

“These declines, while unpleasant, are needed to restore supply and demand to better balance and relieve inflationary pressure,” he said.

“While some of the global drivers of inflation – oil and non-oil commodity prices, supply chain pressures and freight costs – are declining, domestic price pressures and elevated inflation expectations continue to make ‘constrained’ monetary policy the preferred path for central banks.”