Rate spikes in sight, but don’t expect drops soon: Tal

As it continues its fight against rising prices, the BoC has two options, Benjamin Tal said: inflation or recession. “They’ll take a recession any day now,” he said.

Far more important for the central bank is to make sure “inflation is dead,” Tal said. “You want to make sure you don’t repeat past mistakes from the 1980s, when monetary policy was eased prematurely and we had a double-dip recession. So they will take their time before lowering interest rates, and they are very clear on that.

The Bank of Canada slowed its pace to a half-point rate hike on Oct. 26 in an effort to avoid an overshoot or monetary policy error that contributes to a recession, Tal said.

But that doesn’t mean the central bank is finished. He expects the rate to rise again this year from 3.75% to 4.25% or even 4.5% before Tiff Macklem and co. press the pause button. And once rates peak, Tal doesn’t expect cuts to begin until at least 2024.

Slowing the pace of hikes doesn’t mean a recession can be avoided, either. Tal said his base case scenario was of a mild or technical recession with falling GDP but little impact on the labor market – “wwith the work market fundamentally bleeding vacant jobs as opposite at works.”

In a less likely scenario of more rigid inflation, Tal said, the central bank may have to raise rates above 5%, leading to a full-blown recession and rising unemployment. This could force the Bank of Canada to start cutting again next year.

For now, Tal said there was enough positive inflation news to support the scenario of a mild recession.

US inflation fell to 7.7% in October, falling short of expectations and leading to a rebound in stock markets following the news last week. (The Canadian figure will be released this week.)

“The most important story is that the external shock to inflation, namely the supply chain, is starting to decline,” Tal said. “And that’s extremely important because the more you see the supply chain [issues] decreases, the more power the Bank of Canada has over inflation.

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Carol N. Valencia