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Does the Bank of Canada Want a Recession? RBC, BMO Bankers Think So

Published 2022-09-22, 12:49 p/m
© Reuters

By Ketki Saxena 

Investing.com -- Earl Davis, chief of fixed Income and money markets at BMO (TSX:BMO) Global Asset Management became the latest banker to chime in on the likely unavoidability of a recession in Canada, as interest rates still have a long way to go before inflation is back to its two percent target. 

Davis believes that “The likelihood of a recession is 99.99%” in Canada, and interestingly, that “Central bankers actually want a recession.” 

 “It may end up being a policy mistake. But the playbook says you have to get a recession” in order to cool an overheated economy and bring inflation back to target. He also disagreed with calls from economists, for example at RBC (TSX:RY) and Desjardins, who have been calling for a “mild” recession, because unlike past hiking cycles such as in 2018, the Federal Reserve and other central banks are far behind the inflation curve -- and rates will have to stay higher for longer to cut demand. 

He isn’t the only major BMO banker to believe a recession is necessary and in fact the goal of the Canadian central bank. Immediately following the Bank of Canada’s 75 bp hike in early September, a similar sentiment was voiced Benjamin Reitzes, managing director, Canadian rates & macro strategist, BMO Capital Markets. 

Reitzes noted that “The Bank still expects growth to slow in H2, with tighter policy having an impact. Indeed, policymakers want to see a few quarters of below-potential growth and some loosening of labour market conditions before they’ll be more comfortable with the inflation outlook.”

Josh Nye, senior economist at RBC Economics, also voiced his belief at the time that “The Bank’s expectation that growth will moderate in the second half of the year [is] a slowdown that’s needed to bring demand more in line with supply.” 

The Bank of Canada’s goal at this stage, in order to tame inflation, is to slow economic growth, cool an overheated housing market, temper a still robust job market to cap wage growth, and prevent a wage-price spiral. But does the Canadian Central Bank intend to cause a recession? 

The BoC - in stark contrast to private sector economists - continues to believe that a recession is avoidable in Canada, and insists that a soft landing remains possible in Canada. However, if the choice is between stabilizing price growth, or triggering a downturn, the Canadian central bank remains committed to bringing inflation back to target, even at the cost of a recession. 

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